FEDERAL COURT OF AUSTRALIA
CONTRACT - supply and purchase agreement - formation - offer and acceptance - absence of formally signed contract - alleged incompleteness and uncertainty - commercial agreements - implied terms - conditions of implication - business efficacy
CONTRACT - sale of woodchip - evidence of surrounding circumstances and conduct of parties admissible to determine whether concluded agreement - whether exchange of documentation setting out contractual terms condition precedent to binding contract - Masters v Cameron
W Howarth The Meaning of Objectivity in Contract (1984) 100 LQR 265
Professor Lucke Arrangements Preliminary to Formal Contracts 1967 Adel LR 46
Carter and Harland Contract Law in Australia 3 ed (1996)
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 applied
Secured Income Real Estate (Australia) Ltd v St Martin’s Investments Pty Ltd
(1979) 144 CLR 596 cited
Codelfa Construction Pty v State Rail Authority of New South Wales (1982) 149 CLR 337 cited
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 cited
Hawkins v Clayton (1988) 164 CLR 539 followed
Byrne v Australian Airlines (1995) 131 ALR 422 followed
The Moorcock (1889) 14 PD 64 applied
Hillas & Co v Arcos Ltd (1932) 147 LT 503 applied
Vroon BV v Foster’s Brewing Group (1994) 2 VR 32 applied
Didymi Corp v Atlantic Lines and Navigation Co. Inc [1988] 2 Lloyd’s Rep. 108 cited
F & G Sykes (Wessex) Ltd v Fine Fare Ltd [1967] 1 Lloyd’s Rep 53 applied
Custom Credit Corporation Ltd v Cenepro Pty Ltd (unreported, C.A. (NSW)
7 August 1991) cited
Masters v Cameron (1954) 91 CLR 353 followed
Allen v Carbone (1975) 132 CLR 528 considered
Von Hatzfeldt-Wildenburg v Alexander [1912] 1 Ch 284 cited
Sinclar Scott Co Ltd. v Naughton (1929) 43 CLR 310 cited
Branca v Cobarro [1947] KB 854 considered
Rossiter v Miller (1878) 3 App. Cas 1124 applied
Air Great Lakes Pty Ltd v K.S. Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 applied
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 applied
Brogden v Metropolitan Railway Co (1877) 2 App. Cas 666 applied
Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 (C.A(N.S.W.)) applied
Legione v Hateley (1983) 152 CLR 406 followed
AUSPINE LIMITED (ACN 004 289 730) v AUSTRALIAN NEWSPRINT MILLS LIMITED (ACN 009 477 132)
NO SG 26 OF 1997
O’LOUGHLIN J
ADELAIDE
23 JANUARY 1998
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IN THE FEDERAL COURT OF AUSTRALIA |
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BETWEEN: |
AUSPINE LIMITED (ACN 004 289 730) Applicant
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AND: |
AUSTRALIAN NEWSPRINT MILLS LIMITED (ACN 009 477 132) Respondent
AUSTRALIAN NEWSPRINT MILLS LIMITED (ACN 009 477 132) CROSS CLAIMANT
AUSPINE LIMITED (ACN 004 289 730) CROSS RESPONDENT
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DATE OF ORDER: |
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WHERE MADE: |
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THE COURT ORDERS THAT:
This matter be adjourned sine die with liberty to either party to relist it for mention on 14 days notice.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
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IN THE FEDERAL COURT OF AUSTRALIA |
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JUDGE: |
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DATE: |
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PLACE: |
FINDINGS OF FACT AND LAW
On 22 January 1997, Mr Russell Horner, the managing director of Australian Newsprint Mills Ltd (“ANM”), the respondent in these proceedings, wrote the applicant, Auspine Ltd (“Auspine”) (Ex A279) saying:
“I refer to recent communications between representatives of our respective companies concerning our future relationship.
Having considered at length ANM’s position, it has been decided that ANM will discontinue its purchase from Auspine of sawmill chips. Rest assured this is not a decision which we come to lightly.
We do not propose that supply of sawmill chips should stop with immediate effect. Rather, as a gesture of good faith, ANM will continue to purchase the current quantities of chips until the end of March, providing they conform with specification”.
As a result of that letter, Auspine instituted these proceedings seeking, primarily, an order for specific performance by ANM of its obligations under an agreement, described in the statement of claim as “the 1995 agreement”. Broadly, the case for Auspine is built around an allegation that in August 1995 ANM committed itself, for a term of three years, to purchase all Auspine’s woodchip that was produced at its Scottsdale mill. It is Auspine’s case that ANM was not therefore entitled to discontinue its purchase of that chip as contemplated in its letter of 22 January 1997. Auspine sought interlocutory injunctive relief; however it was not necessary for the Court to resolve that application for the parties came to an agreement that they would continue their trading arrangements pending the outcome of the substantive litigation. Consent orders were made to accommodate the parties’ temporary resolution of their dispute.
The parties are also in dispute over the quality of some of the sawlog that ANM supplied to Auspine. Auspine rejected deliveries of sawlog from the Star of Peace plantation on the ground that those logs were not to specification. ANM has denied this allegation and has cross-claimed seeking damages as a consequence of Auspine’s refusal to accept that sawlog. ANM is seeking further damages from Auspine alleging that it breached various agreements to supply sawmill chip to specification.
During the pre-trial processes, it was agreed by the parties that it would be expeditious to proceed to the trial of certain limited issues, leaving for a later date questions of the quantification of damages if and when they should arise; it is for this reason that these remarks are described as “Findings of Fact and Law”; in due course the parties will be able to make their submissions on the further prosecution of these proceedings.
Auspine has a very large operation in the timber industry in the south east of South Australia, in Victoria and also in Tasmania. Although incorporated in Victoria, it has its head office in South Australia at Tarpeena, a small town near Mount Gambier. Since 1987, Auspine has been the proprietor of a timber mill at Scottsdale in the north of Tasmania where it processes timber, and in particular, radiata pine, for sale in Australia and overseas. The raw material that it purchases comes mainly from plantations in areas in the north of Tasmania and mostly from the Tasmanian Government. When delivered to the mill, the timber that is relevant to these proceedings is known as “sawlog”. At the mill the purchased timber is de-barked and then processed through a “green” mill; during this process logs are sawn into various sizes of timber. Next the sawn timber (which is then unseasoned) is kiln dried through specially constructed kilns and thereafter it is “dry” milled, that being the finishing process before the timber is packed for dispatch to market. In the main, the Scottsdale mill processes sawlog for the production of timber products suitable for structural use in the construction industry. The standard of the timber so produced is higher than the standard known as “Merch” quality; “Merch” is used for posts, rails and other lesser purposes.
A by-product that is produced at the Scottsdale mill as a result of processing sawlogs is radiata pine chip, sometimes called “sawmill chip”, “woodchip” or “residue chip”; that woodchip is used in the production of paper and paper products.
ANM is the proprietor and operator of a newsprint and timber mill at Boyer, Tasmania. It also owns and manages timber plantations, processes timber that is harvested from its own plantations and others and presents it for sale in the form of sawlog or pulpwood. At the Boyer mill, ANM also produces woodchip: this comes from chipping timber that has been harvested from its own plantations or purchased from other timber harvesters. That woodchip, along with chip purchased from external suppliers (of whom Auspine is one) is then used by ANM in its production of newsprint and other paper products. Since its acquisition of the Scottsdale mill, Auspine has regularly sold to ANM residue chip that has been produced at that mill.
Until early 1997 when ANM gave notice that it proposed to discontinue its purchase of Auspine’s chip, the parties had had a long and important - albeit at times a turbulent - relationship. An example of the importance of that relationship may be found in ANM’s letter of 25 February 1993 (Ex R14). ANM wrote Auspine noting that Auspine supplied “almost a quarter of [ANM’s] annual intake” and commenting that ANM’s reliance on the Scottsdale mill’s performance was “to be conservative, important”. To adjudicate upon the competing claims that each party has made, it is now necessary to have regard to the history of that relationship and, in particular, to the nature of that turbulence.
HISTORY: 1991 - 1995
A convenient starting point is a letter from ANM dated 15 October 1991 (Ex A3). The letter was addressed to SEAS Sapfor Ltd, Auspine’s name until it changed to its present name on 18 May 1995. After complaining that there were problems concerning the quality of Auspine’s chips, the author of the letter nevertheless went on to say:
“We are aware that our contract with you expires at the end of this financial year and in this context we would seek to commence negotiations for renewal of this contract for a further five year period.”
However, seven months later in May 1992, ANM wrote Auspine informing it that ANM would not be renewing the contract because of “on-going problems with chip quality”. The letter said in part:
“We have written to you on previous occasions in relation to this matter and undertaken mill visits to discuss the matter with you personally and other members of your staff. Notwithstanding this we continue to receive loads of chips which are contaminated with very large pieces of timber and metal objects that, together with an ongoing oversize problem, makes your chips unsuitable for ongoing use at our Boyer mill.”(Ex A4)
The letter ended with a conciliatory note to the effect that ANM may be prepared to reconsider the position if Auspine could demonstrate that it was able to overcome the problems of contamination and general chip quality. It would seem that Auspine was able to meet ANM’s demands; following an inspection of Auspine’s Scottsdale mill, ANM wrote Auspine on 14 July 1992 in these terms:
“I wish to confirm that, providing the remaining quality problems with your chips could be rectified quickly (these appear to relate to removal of oversized slivers and occasional contamination with metal objects), then we will establish a new long term contract with you. Size distribution of your chips now seems to be generally fairly good and in line with our specifications. We would also like you to examine measures to improve the moisture content of your chips.
I understand that you now anticipate a long term chip volume of approximately 50,000 tpa and, in this regard, we would be prepared to enter into a five or ten year contract.”(Ex A7)
One of the most contentious issues in this trial was the identification of the specification that was applicable to the residue chip that was to be supplied by Auspine to ANM. It was Auspine’s case that the parties had agreed in 1995 that the chip to be supplied would meet the specification that is and was used by the export section of Auspine in respect of woodchip destined for export markets. That specification was described in evidence as “Auspine’s Export specification”. ANM disagreed, claiming that the chip had to meet the “Boyer mill specification”, a specification which I accept as being higher than Auspine’s Export specification. A second contentious issue was whether the parties had committed themselves in 1995 to a long term agreement. ANM’s letter of 14 July 1992 (Ex A7) is therefore of interest in that, first, it refers to Auspine’s chips being “in line with our specifications” (which I take to be the Boyer mill specification) and secondly, it shows that ANM were looking for a long term contractual commitment from Auspine.
Auspine continued to supply woodchip while negotiations with respect to the terms of the contract continued. In November 1992 Mr de Bruin, the managing director of Auspine wrote ANM on various issues, one of which was chip quality, stating:
“3. Chip quality to meet the attached specifications for size distribution (within reason), bark content and moisture, and must be free of foreign material (ie. no contamination).”(Ex A9)
The specification to which he referred was not identified by name but I have little doubt, having regard to the rest of the evidence, that it was Auspine’s Export specification.
By letter dated 23 February 1993 (Ex R13) ANM wrote Auspine complaining about contaminated chips. The situation was described as “quite intolerable”. The letter is also important for its mention of “our specification”, which I again take to be a reference to the Boyer Mill specification. The letter concluded with the advice:
“We will not accept any further loads until these problems are rectified”.
Despite this ultimatum, the parties were able to resolve their problems. Once again, deliveries resumed and negotiations resumed. On 13 October 1993, Mr Neil (“Curly”) Humphreys, the general manager of the division known as ANM Forest Management, wrote Mr de Bruin thanking him for his participation in the development of “a new woodchip purchase contract” (Ex A15). Mr Humphreys’ letter offered the following terms:
“1. ANM agrees to purchase approximately 55 000 green metric tonnes per annum of Pinus radiata woodchips from your sawmill at Scottsdale.
2. Chip quality must meet the attached specifications for size distribution, bark content and moisture, and must be free of foreign material.
3. An impartial sampling procedure will be implemented to assess chip quality compliance.
4. The term of the new contract will commence on November 1, 1993. The contract may be determined by either party in writing 1 year in advance of the termination date.
5. ANM will pay a price of $36.40 per green metric tonne loaded on to truck or rail wagon at your mill.
6. The price will be indexed to movements in the average Australasian radiata pine FOB chip export price and the Australian/US dollar exchange rate, and will be adjusted at three month intervals thereafter in accordance with a formula to be mutually determined.
7. The terms listed above will form the basis of a new contract which will be drafted by ANM on receipt of your acceptance of the Heads of Agreement.”
Paragraph 2, as quoted above, referred to “the attached specifications”. Unfortunately, no such specification was attached to the exhibit but, again, I am prepared to assume that it was the Boyer mill specification.
However, a week or so later, on 22 October 1993, a Mr Worley, who described himself as ANM’s “Softwood Harvesting Superintendent” wrote Auspine’s mill manager at Scottsdale complaining that “over the past four weeks your woodchip quality has been extraordinarily poor; in particular the occurrence of long, unprocessable slithers has caused us to reject several loads” (Ex R17).
It does not seem that there was an immediate response from Auspine to Mr Humphreys’ earlier offer of 13 October and so the matter dragged on. But in early 1994, ANM’s sawlog had been drawn into the equation. ANM approached Auspine, advising that several of ANM’s pine plantations were approaching a stage whereby they would be ready for harvesting. It was suggested that it might be in the mutual interests of both parties for them to be involved in a two way contract whereby Auspine would supply residue chip to ANM whilst ANM supplied sawlog to Auspine. On 14 March 1994 Mr T G H (“Geoff”) Bankes, Auspine’s general manager, Resource Management Division, wrote Mr Humphreys of ANM stating that Auspine was “interested in developing a long term arrangement with ANM Ltd for sawlog purchase” (Ex A23).
On 9 September 1994, Mr Paul Hingston of ANM sent a copy of ANM’s woodchip specification to Auspine; Exhibit R26 is a facsimile transmission from Auspine responding to Mr Hingston in these terms:
“Paul, I have discussed your chip spec as per your fax of 9/9/94 with Mike Brill our Q.C. officer and we agree that your spec is acceptable and achievable to us as printed.”
Although the term “Boyer mill specification” was not used, I am satisfied that these transmissions were referring to that specification. I am also satisfied that in the period immediately following these transmissions the Scottsdale mill was, to the best of its ability, attempting to supply chip to the Boyer mill specification.
The matter progressed to the point where ANM’s Mr John Simpson, wrote his company’s solicitors by letter dated 21 October 1994, (Ex A29) instructing them to prepare a draft agreement for the purchase of woodchip from Auspine. A matter of relevance to these proceedings that was referred to in the letter of instruction was a reference to a particular specification set out in the schedule to that letter with the note that ANM, in its discretion, could either reject any load that failed to comply with the specification or apply penalties. The letter also stipulated that the term of the agreement was to be for a period of five years commencing on 1 January 1995.
The letter of instruction did not, however, make any mention of ANM selling sawlog to Auspine.
At about the same time, Auspine prepared a document entitled “Memorandum of Understanding” (Ex A31). The introductory sentence of that document was as follows:
“This memorandum sets out the basis of an intended agreement between SEAS Sapfor Ltd (“SEAS”) and A.N.M. Forests Ltd (“ANM”) for purpose of purchase and sale of Pinus radiata sawlogs and sawmill residue woodchip.”
One of the terms of this document was to the effect that the volume of sawlog that ANM would make available to Auspine for purchase would increase from 20,000 cubic metres in 1995/96 to “a desirable level” of 200,000 cubic metres by the year 2000: (the parties are in agreement that a cubic metre approximates one tonne). This reference to the year 2000 was perpetuated in correspondence from both litigants but it was the evidence of witnesses for ANM that it was a mistake and that it should have been a reference to the year 2010. The issue generated some controversy but I do not attach much weight to it. I am inclined to the view that I should accept the evidence of ANM’s witnesses on this subject. There was no reason for them to state falsely their company’s likely future production. In any event, Auspine failed to establish how they were misled by the erroneous reference to the year 2000. Indeed, there is reason to believe that Auspine was initially the party responsible for inserting the incorrect year and that ANM’s error was merely its failure to note Auspine’s mistake.
The Memorandum of Understanding also included a term that ANM was to purchase all the sawmill residue chip from Auspine’s Scottsdale mill. This is another factor that has achieved a measure of importance in this litigation. Auspine lacked facilities at the Scottsdale mill to stockpile unsold woodchip. Residue chip can deteriorate over a period of time and hence, so it was claimed, Auspine was concerned to establish an outlet for the disposal of all its woodchip. The Memorandum contemplated the parties completing and executing two agreements - one called the “log supply agreement” and the other called the “wood chip agreement”. A copy of that Memorandum of Understanding was forwarded to Mr Humphreys.
Mr Humphreys wrote Mr Bankes by letter dated 25 November 1994: (Ex A33). He made no mention of the Memorandum of Understanding nor of its contents but he addressed in detail issues of pricing for the residue chip and the sawlog, setting out a series of calculations as examples of his proposals. Both pricing structures were based on export prices and I find that both parties were happy to adopt export parity as a base for establishing the ultimate sale price of their respective products.
Mr Humphreys wrote Mr Bankes again on 12 December 1994 (Ex A36). On this occasion Mr Humphreys said that ANM would purchase all Auspine’s sawmill chips generated from Scottsdale. He referred to a “five year rolling term” and concluded by saying that “an arrangement for the sale of sawlogs from ANM forests to SEAS will be put in place”. This letter brought an immediate response from Mr Bankes on 13 December (Ex A37). After stressing the importance of a “reliable and consistent market for all our residue chip from Scottsdale” Mr Bankes said:
“As the mill is now consistently producing woodchip of a quality acceptable to ANM the purchase of all this material as it is produced should not present a problem.”
He then accepted the various proposals that Mr Humphreys had set out in his letter save that he said that Auspine preferred a three year rolling term. ANM replied to Mr Bankes’ letter by letter dated 22 December 1994 (Ex A40). It was signed by Mr Arnold Willems, the acting general manager of ANM Forest Management. The letter stated in part:
“With reference to the conditions you have placed on ANM’s previous offer these are acceptable, except for the interim increase of price from the 1 January 1995.”
The question of price was, of course, of critical importance, but it would seem, nevertheless, that the parties were moving closer to a concluded agreement.
Then on 13 January 1995, Mr Humphreys sent Mr Bankes a draft agreement (Ex A41) for his perusal and comments. The draft had been prepared by ANM’s solicitors; it addressed several of the issues that have been debated throughout this trial:
· in recital D it contained an acknowledgment that the Pinus radiata chips that were produced by Auspine at its Scottsdale mill “will meet” ANM’s “requirements and specifications”;
· rather than containing a commitment to purchase all the chip, there was a provision for an annual maximum of 80,000 tonnes with a minimum of 45,000 tonnes;
· all chip sold was to comply with the specification contained in the sixth schedule to the draft;
· The sixth schedule was attached to the draft agreement; it contained a specification entitled “Fine Chip Specifications 100% Pinus Radiata”. The schedule also contained particulars of chip sizes plus provision for bark and slivers with some additional comments one of which was as follows:
“It is agreed and acknowledged ... (that) it is desirable to consistently have higher percentages of 25mm, 22mm, 16mm chips, as indicated by ANM’s Pine Chip Plant specifications. Those upper levels indicate expectations, given current constraints but the longer term goal is for an upward trend in percentage of chips in these sizes.”
· the term of the agreement was expressed to be five years, rolling over on an annual basis for a further term of five years commencing on the day after the expiration of the first year of the original term and the first year of each successive term, with a maximum term of twenty years unless earlier cancelled.
The agreement did not contain the price payable by ANM for the residue chip. There was a statement in the draft that it was “to be agreed”. Furthermore, the agreement made no mention of the sawlog that ANM was to sell to Auspine.
On 31 January 1995, Mr Humphreys submitted a confidential memorandum to his managing director, Mr Ogilvie (Ex A42). Mr Ogilvie, who gave evidence in the trial, resigned as managing director of ANM in mid September 1995 to take up a position in Malaysia. He was ultimately replaced by Mr Horner in that position. I regard Mr Ogilvie as an impressive and truthful witness and aspects of his evidence have been of material importance to me in coming to some of my conclusions. Mr Humphreys’ memorandum dealt only with the subject of chip residue; it did not mention the sawlog. The opening sentence of the memorandum was as follows:
“On 24/1/95 the following deal was concluded with Geoff Bankes, General Manager of SEAS for the supply of sawmill chips from Scottsdale to Boyer.”
But the concluding sentence showed that the parties had not yet made firm contractual commitments. It read:
“The major uncertainty of this arrangement is of course Adrian Debruin (sic). I made it clear to Geoff Bankes that if Adrian comes over the top (which is his entitlement as Managing Director) we would not review only one issue but all issues would be open for review. Geoff accepted this and he felt confident that Adrian would agree to this deal. We await confirmation sometime next week.”
The deal to which Mr Humphreys referred in his memorandum to Mr Ogilvie covered the following subjects:
· a five year rolling term
· the purchase by ANM of all chip produced by Auspine at the Scottsdale mill
· each party to increase its storage facilities
· on “Price” and “Indexation” the memorandum said:
“$36/tonne. Current price is $31.50/tonne and the current residual export price is $37.45/tonne (see calculation attached). We are disappointed to suffer the price increase but given the export price and the built in long-term security of these arrangements $36 is not an unreasonable price.
Prices will be indexed January 1 each year and will be based on chip export prices from Australia of radiata and the West Coast transaction price of newsprint.”
· the term of the agreement was to commence on the “Signing of Heads of Agreement”.
Unfortunately, Mr de Bruin did come “over the top” and so the expected agreement failed to materialise. On 2 February 1995 Mr Bankes wrote Mr Humphreys (Ex A 44) telling him that Mr de Bruin was seeking a higher price - $38 per tonne - for the residue chip with six-monthly pricing reviews. Mr Bankes also wrote that Auspine sought a rolling term of three years in lieu of the five years suggested by ANM. Mr Bankes wrote Mr Humphreys again on 15 February 1995 (Ex A45). This letter came shortly after a conference that had occurred in Canberra a week earlier involving representatives of the parties. Mr Bankes wrote:
“We remain firm on price but are prepared to accept a 5 year agreement for both residue woodchip and sawlog sale/purchase.”
In this letter there was another reference to 200,000 cubic metres of sawlog being available by the year 2000.
The next item of correspondence was a letter dated 28 February 1995, Ex A 47, from ANM’s Mr John Simpson to Mr Bankes in which ANM accepted the higher price of $38 per tonne. Mr Simpson stated in his affidavit affirmed on 16 May 1997 that he had been employed by ANM in its division known as ANM Forest Management for approximately eleven years. For the last four of those years, he had worked in a position that carried the title Fibre Supply Manager. In his letter of 28 February, Mr Simpson, a witness in the trial, perpetuated the reference to the year 2000 saying:
“4. Sawlogs
(i) ANM to give SEAS the first right to purchase sawlog on a ratio based on woodchip deliveries to ANM.
(ii) Sawlog sales will be made from ANM’s statewide operations and will vary from time to time. For the next five years a minimum indicative volume would be in excess of 10 000 cubic tonnes rising to some 200 000 tonnes by the year 2000.
(iii) Delivered price at Scottsdale will be the equivalent market value by grade and specification.”
Mr Simpson and Mr Humphreys remained adamant in their evidence however, that the reference to 2000 was an error and that it should have been 2010.
At this stage, although ANM had agreed the increased price of $38 per tonne, the parties had not agreed on the method of indexing price reviews. The parties continued to negotiate and correspond throughout March including one particular letter, Ex A48 dated 3 March 1995, from Mr Jim Panagopoulos of Auspine to Mr John Simpson. Mr Panagopoulos described himself as “Strategic Planner Manager Resource Management”. He wrote in response to Mr Simpson’s letter to Mr Geoff Banks dated 28 February 1995, Ex A47, and among other things, he confirmed in his letter that it had been agreed that $38 per tonne ex Scottsdale was the price to be paid by ANM for residue chip. He added “this has been implemented”. He also said that it was his understanding that the figure of $38 per tonne was to be back dated to 1 January 1995 but he also noted, as was the case, that Mr Simpson had said in his letter of 28 February 1995 that “the implementation date would be on exchange of letters between our respective managers”. As to this, Mr Panagopoulos said in his letter, “this point needs clarification”. Mr Panagopoulos further wrote that the question of the agreed sawlog price still remained unanswered and that Auspine was still seeking confirmation from ANM that Auspine’s current sawlog price of $54 per cubic metre delivered to Scottsdale would be the base figure for initial deliveries. Mr Panagopoulos also acknowledged that another outstanding issue was that dealing with periodic price reviews.
Mr Ogilvie, as ANM’s managing director, wrote personally to his counterpart, Mr de Bruin by letter dated 7 March 1995: (Ex A49). This letter added little to the resolution of the outstanding matters although it did contemplate that the parties would ultimately sign “Heads of Agreement” and it reaffirmed “the authority of Curly Humphreys, General Manager of ANM Forest Management to conclude the agreements without further recourse to me”.
On 23 March 1995 Mr Humphreys wrote Mr Bankes (Ex A55) saying, among other things:
“Prices
We have agreed that the price to be paid for both woodchip and sawlog is the export parity discounted to reflect local conditions.
In the case of woodchips from SEAS this has been done and agreed to at a rate of $38.00/tonne ex the Scottsdale sawmill.
For softwood sawlogs you have suggested the benchmark be export “K” grade sawlogs priced ex NZ ports to which we agree.”
Mr Humphreys then proceeded to set out his method of calculating the price of the sawlog to be delivered to the Scottsdale mill. Later in his letter, Mr Humphreys referred to “Strategic Issues”, a term that had earlier been used in correspondence between the parties. Under that heading, he said:
“The strategy issue is important and covers more than a simple price differential. The benefits to both parties from a partnership can be summarised, in no particular order of importance, as follows:”
The benefits to Auspine and ANM were then listed. They included a guaranteed market for Auspine’s chip residue and a guaranteed source of that chip for ANM. However Mr Humphreys sought to apply a measure of pressure to Auspine as he concluded his letter by saying:
“Finally, I reiterate that existing prices and conditions will continue until heads of agreement are signed. I repeat that no back payment will be made.”
Mr Humphreys’ letter brought an immediate reply from Mr Bankes and with it the parties grew further apart. Mr Bankes’ letter was dated 24 March 1995 (Ex A56). He disagreed with aspects of Mr Humphreys’ pricing calculations and he complained that ANM had still failed to commit itself to the quantity of sawlog that it would supply over the next five years. Perhaps the issue that most upset Mr Bankes was ANM’s refusal to pay $38 per tonne for back deliveries of woodchip. His complaint with respect to this subject was followed by the statement:
“It seems to us that we are being pushed towards the export alternative, an option that we have not discarded.”
The reference to “the export alternative” meant that Auspine would be looking to sell its woodchip through the export market. If this were to happen it would deprive ANM of an important source of supply. Mr Humphreys conceded, during the course of his cross-examination, that this statement was a matter of concern to ANM. In fact, ANM was so concerned that it wrote the Commonwealth Minister of Resources on 1 June 1995 (Ex A84) in the hope that the Minister would intercede and prevent Auspine from entering the export market. Mr Humphreys seemed reluctant to acknowledge what was obvious. He agreed that Auspine’s alternative plan to enter the export market was “a real possibility” (T848). The following passage from his cross-examination exhibited his extreme discomfort about aspects of ANM’s conduct in this matter. It was not the only occasion when I had cause to be concerned about Mr Humphreys’ reliability as a witness:
“That is why you and Mr Simpson set up the strategy to block those export attempts, was it not? --- Yes, we put our case to the Minister. It was his decision of any blocking.
Yes, I know, but I am talking about your strategy. I will put it again: it was because you knew that it was a real possibility that Auspine would go into export sales that you and Mr Simpson set up the strategy to block those attempts, was it not? --- We put our case to the Minister and it was his decision.
Mr Humphreys, I will do it once more. It is very simple if you just follow it through. Forget about the Minister for the moment and what you in fact did. What I am asking you about is why you did it. I will put it again. Because you knew that it was a real possibility that Auspine would go into export sales you and Mr Simpson set up the strategy to block those attempts, did you not? --- Yes, we put our case to the Minister.
Because you realised it was a real threat to you? --- Because we wanted to use their chips.” [T848]
On 21 April 1995 Mr Bankes wrote Mr Humphreys (Ex A65) in reply to a letter from Mr Humphreys’ dated 4 April (Ex A57). Because of its importance, it is desirable to set out the full text of Mr Bankes’ letter as it clearly identifies the contentious issues that were confronting the parties at that particular time:
“Thank you for your communication dated 4 April and advice that the sawlog supply likely to be a available for purchase by S.E.A.S is limited to around 10,000 cubic metres per annum over the next 5 years.
This quantity falls well short of our expectations being no more than 4% of our current availability. In other words the volume over the next 5 years is insignificant.
Our view is that the strategic alliance as put is very heavily in favour of ANM Ltd as we were talking about supply of 100,000 tonnes of quality residue woodchip per annum against a meagre log supply.
Accordingly we are unable to continue to make available for sale residue woodchip at current and future production levels at less than world prices where there is insufficient sawlog on a reciprocal basis to reach a strategic position that is mutually beneficial to all parties. This position is exacerbated by ANM Ltd refusal to pay for the residue woodchip from 1 January, 1995 at a rate stated in my letter dated 24 March, 1995 and as had previously been agreed upon subject to clarification of sawlog availability.
Supply of woodchip from our Scottsdale sawmill to ANM Ltd will therefore be phased out week commencing 24 April, 1995.”
Auspine had taken the decision to cease supplying ANM with woodchip because during the month of April it had succeeded in establishing a commercial arrangement to export woodchip through North Forest Products, a Tasmanian division of North Broken Hill Ltd (which held an export licence) to Mitsubishi. Auspine commenced deliveries of woodchip to North Forest Products on 26 April 1995 and negotiated with Mitsubishi to the stage where Mitsubishi submitted to it on 16 May a draft of a long term (five year) contract for the supply of pine woodchip. Exhibit A63 is a facsimile transmission from Mr Mike Plummer, Auspine’s Export Harvesting manager, to North Forest Products dated 21 April 1995, informing of Auspine’s intention to start moving woodchip immediately to North Forest Products’ Burnie facility at the rate of approximately 1,000 green tonnes per week. No fixed term appears to have been agreed as Mr Plummer’s letter said that Auspine will continue “to monitor this new arrangement with a view to development of long term business relationship”. The evidence of Mr Plummer (T290) made it clear that Auspine was intending to apply for an export licence so that it could deal directly on the overseas market and with international purchasers such as Mitsubishi. As Mr Plummer acknowledged, its arrangements with North Forest Products would be “short-term”; Auspine was intending to by-pass North Forest Products if and when it obtained its export licence.
Mr Humphreys sought to retrieve the situation. He wrote Mr Bankes on 27 April, (Ex A67) acknowledging Mr Bankes’ letter of 21 April, (Ex A65), warning that North Forest Products could be in breach of its export licence conditions by exporting Auspine’s chips, but nevertheless saying:
“Your rejection of sawlog purchases from ANM is accepted. Because of your previous desire to amalgamate sawmill chip and sawlog sales in the one agreement, there is now no impediment to concluding our agreement on sawmill chips.
As you know we have been in agreement that the sawmill chip purchases should be at commercial rates.”
Mr Humphreys concluded by urging that the parties meet and confer. The latter part of Mr Humphreys’ letter shows clearly that Auspine had the upper hand at that stage:
“Given your precipitous discontinuation of chip supply it is frustrating that you cannot meet ANM before the week commencing May 8. If you should reconsider this, I am available on May 3, 4 or 5 in Mt Gambier or Melbourne. I am also available on May 10 or 12.”
Mr Bankes applied further pressure. On 8 May 1995, he wrote Mr Humphreys (Ex A74) telling him that Auspine would not agree to hold further discussion unless ANM first paid it $197,676.50. Previously, Auspine had sought back-payments from 1 January 1995, but the figure of $197,676.50 was the amount required to bringback payments for woodchip since 1 July 1994 up to $38 per tonne. ANM refused to meet this condition, Mr Ogilvie describing it as “very provocative” (T520) and Auspine ultimately withdrew it. Mr Ogilvie said the withdrawal of that condition “was a great relief to us”. Nevertheless it represents a useful indicator of the hard bargaining that was then evident. Meanwhile, ANM was taking legal advice, not only with respect to its position with Auspine, but also with respect to the conditions attaching to North Forest Products’ export licence. It is clear to me and I so find that ANM was attempting to close off this outlet as a source of sales for Auspine so that Auspine would be forced to deal with ANM. In my opinion, the material that has been extracted from the documentary evidence to this stage in the parties’ negotiations justifies a finding that ANM was most concerned to reactivate the supply of residue chip to it by Auspine and, for that purpose, it was prepared to commit itself to long term arrangements for the supply of that woodchip. Whether it did or did not so commit itself remains to be considered, but the circumstances clearly point to a willingness on its part to do so.
JUNE - JULY 1995
Ultimately the parties were able to arrange a meeting on 2 June 1995 at Auspine’s Tarpeena premises in South Australia. Mr Humphreys and Mr Simpson attended the meeting on behalf of ANM; Mr de Bruin and Mr Bankes represented Auspine. The ANM representatives at the meeting reported the results of the meeting to Mr Ogilvie who wrote a report to his Board of Directors on 6 June (Ex A90). Mr Ogilvie first submitted a draft of his report to Mr Humphreys who made certain amendments to it. There are several aspects of that report that warrant a mention:
· Mr Ogilvie reported that the loss of Auspine’s chip “would incur an incremental cost of around $4 million p.a. at current pulp prices”. The passage just quoted had appeared in the draft that had been examined by Mr Humphreys. Mr Johnson, an expert witness who was called to give evidence on behalf of ANM, rejected this figure, agreeing that it was “ridiculous” (T1040); he thought the increase would be about $160,000. It is not necessary to resolve this disagreement. The matter of importance is that Mr Ogilvie and Mr Humphreys both thought the size of the loss would have been the figure of $4m and that would have been the figure that influenced the report and their thinking.
· Mr Ogilvie acknowledged that from June 1994 (ie for the preceding twelve months) the quality of Auspine’s chips “complied with specification”. The details of the specification were not discussed but it is a fair inference that Mr Ogilvie would have been referring his Board to his company’s specification; that is, the Boyer mill specification.
· Mr Ogilvie wrote that it would be “an understatement to say negotiations have been difficult”. He instanced five examples, each of which should be mentioned.
“- Lingering angst from Boyer’s rejection of chips
- Rapidly escalating, profitable alternative opportunities for Auspine on export markets
- An accepted method of determining export price parity
- The practice of Auspine MD, Adrian de Bruin, “coming in over the top” of agreements made with Operations Manager, Geoff Bankes
- Auspine’s desire to gain export parity for their chips but not to value ANM’s sawlog supply to them on the same basis”
However, Mr Ogilvie was able to conclude his report on a happier note. He said of the 2 June meeting that Mr de Bruin had taken “a responsible position”, that there were “some loose ends to be tied up this week” and that a final exchange of letters “was anticipated by mid June”. He further reported that he and Mr Humphreys would be meeting with Mr Bankes on 9 June; he described that as a “deal finalisation meeting”. He said that Mr de Bruin would not be present at the 9 June meeting. Apparently Mr de Bruin had other commitments. However, Mr Ogilvie reported that Mr de Bruin would attend “an expected celebratory dinner ... on Sunday, June 11 to consummate the deal”. The contents of Mr Ogilvie’s report to his Board, although preceding the meeting of 9 June and the celebratory dinner two nights later, points to an expectation on the part of Mr Ogilvie that there was to be a contractual commitment that would be binding on both companies. Having regard to Mr Humphreys’ evidence as it unfolded, it is of significance that Mr Ogilvie made no mention of the chip specification in his report to the Board of ANM; nor did he report that Mr Humphreys and Mr Simpson had experienced any difficulties with Mr de Bruin on the subject of chip specification at the 2 June meeting. There were difficulties at that meeting and they are referred to in some detail later in these findings.
The meeting of 9 June duly took place at the Tarpeena office of Auspine. Mr Ogilvie and Mr Humphreys represented ANM and Auspine’s representatives were Mr Bankes, Mr Michael Young and Mr Michael Plummer. Mr Young was General Manager of Auspine’s Manufacturing division. That entailed the responsibility for the manufacturing process of sawlog to finished product at a number of mills in South Australia, Victoria and Tasmania (including, of course, the Scottsdale mill). Mr Bankes’ division, “Resource Management”, covered plantation management, plantation harvesting, plantation investment and the production of woodchip. There are other divisions in Auspine - “marketing” and “international” being two that were mentioned, but those other divisions are not relevant to these proceedings. In the hierarchy of Auspine Mr Young was on the same level as Mr Bankes; they were each answerable directly to Mr de Bruin as managing director and later to Mr Ryan when he was interposed as deputy managing director. Because of his relatively junior position, Mr Plummer said that he had little participation in the meeting.
Of all those present, only Mr Young of Auspine was able to produce any contemporaneous notes and they were, with one exception, of no value. The exception was an entry “Chip specification - Export Quality”: suggesting, at the least, that the subject was discussed and, at the most, that the specification was agreed. The subject of notes gives rise to another instance where I found disquiet with respect to Mr Humphreys’ evidence. He positively asserted that he took no notes of the meeting. Yet his superior, Mr Ogilvie, although acknowledging that he had no memory one way or the other, said that he would have expected Mr Humphreys to have taken notes, that taking notes would have been normal practice and that Mr Humphreys was “an excellent note-taker” (T529), a compliment that Mr Humphreys denied when it was put to him (T794).
Mr Humphreys, in his attempts to establish that Auspine’s Export specification had been raised by Auspine and rejected by ANM at the meeting of 9 June, clashed with Mr Ogilvie. As Mr Humphreys would have it, there was an open discussion on the subject with Mr Bankes actually saying:
“We would like the agreed chip specification to be based on Auspine’s export specification” (par 38 of Mr Humphrey’s affidavit, affirmed on 16 May 1997).
According to Mr Humphreys, Mr Ogilvie then gave a lengthy answer, explaining how the Boyer mill is a mechanical mill and that the chip specification for a mechanical mill is more stringent than for a chemical mill. Mr Humphreys said that he added to Mr Ogilvie’s remarks by commenting that ANM would have to rescreen all the chip if it did not meet the Boyer mill specification “and that would not be acceptable”. Yet Mr Ogilvie in his evidence said that there was virtually no discussion on the subject of chip specification. In fact, his evidence was that he would have “erupted” at the suggestion of using Auspine’s Export specification. Mr Ogilvie’s contradiction of Mr Humphrey’s evidence cannot be explained away as a lapse of memory on Mr Humphreys’ part. I feel that I must reject Mr Humphreys’ evidence on this subject in preference to that of Mr Ogilvie. I find, based on the evidence of Mr Ogilvie that there was virtually no discussion on the subject of chip specification at the meeting of 9 June.
I also find myself unable to rely on aspects of Mr Bankes’ evidence. It is quite clear that his memory of some important events is deficient. For example, in preparing for these proceedings, Mr Bankes swore an affidavit on 24 March 1997 deposing to events that allegedly occurred at the meetings of 2 and 9 June; he was clearly confused. In par 10.5 of his affidavit, Mr Bankes stated that he recalled Mr de Bruin saying words to the effect “chip quality will be to export specification and not to any other standard”. He then added that he recalled Mr Ogilvie saying words to the effect “we will accept that”. Mr Bankes was wrong. Not only did he mix up the events of the meetings of 2 and 9 June but he was wrong in deposing to Mr de Bruin and Mr Ogilvie being present at the same time at either meeting. Mr de Bruin was present at the meeting of 2 June but Mr Ogilvie was not; Mr Ogilvie was present at the meeting of 9 June but Mr de Bruin was not. I am satisfied that Mr Bankes has engaged in reconstruction and I cannot rely on his memory. Once again I prefer the evidence of Mr Ogilvie.
Mr Ogilvie said (T493) in respect of the meeting of 9 June that he could not remember “any discussion on whether it was meeting Boyer’s specification or not”. As I have said Mr Ogilvie impressed me as a witness of truth. The following passage from his evidence satisfies me that there were no detailed discussions on the subject of the requisite specification at that meeting:
“Are you saying - I am not sure whether I followed - that there was no discussion at all about the chip specification at that meeting? --- I cannot remember any discussion on whether it was meeting Boyer's specification or not. I know had it have been export specification then my whole - my whole 11 years of experience would've erupted. I just would've - would've done nothing else but say, "Hey, hey, it's crazy. We can't accept that. We can't chip" and why would they've brought it, if I can ask a question?
So just to make the clear, you say if it had been brought up you would have to use your words - erupted? --- Yes.
But you did not do that, did you? --- No, I didn't erupt. It was a peaceful, harmonious positive relation-building meeting.
You did not have any discussions about Auspine export specification at all? --- No, it would've been inflammatory to me.
No mention of specification at all whether it be Auspine export, ANM or any other source? --- No, I said I couldn't remember whether it had been – been ANM or not. I presume we did discuss it but I have no specific memory so long ago.
I put it to you again that you were desperate; Auspine's chip standard was high and had been so for some months; that you had agreed already to take all of their chip and that you then agreed to take it on the basis that it was to Auspine export's specification? --- I certainly didn't do the latter and I would never have done the latter. [It] just wouldn't have made newsprint that was satisfactory for my customers. It was an impossible ask. It's - it's that important.” [T493]
The interesting feature about this passage of Mr Ogilvie’s evidence is that it must be reconciled with Mr Humphreys’ evidence that Mr de Bruin was “adamant” at the earlier meeting of 2 June that Auspine would only supply chip to Auspine’s Export specification. Although Mr Simpson would not agree that “adamant” was the appropriate word, he accepted that Mr de Bruin “was a strong personality” and was maintaining that “it had to be Auspine’s export specification” (T1068). Mr Humphreys conceded, more than once, during the course of his evidence (T 835, 843, 855, 857-859) that at the 2 June meeting Mr de Bruin was “adamant” that any residue chip that would be supplied by Auspine to the Boyer mill was to meet Auspine’s Export specification. But he also claimed that he told Mr de Bruin that the chip had to meet the Boyer mill specification; he agreed that this therefore amounted to a contradiction of Mr de Bruin’s proposal (T861). He said also that he told Mr Ogilvie about the stand that Mr de Bruin had taken. I cannot accept that statement. If Mr Humphreys or Mr Simpson had reported in those terms to Mr Ogilvie, he would have said so in his evidence and he would have included in his report to his Board some reference to the disputed subject of the specification. If one managing director was “adamant” that his company’s specification was to be used and if the other managing director would have “erupted” at that suggestion how did the two companies reach a solution that allowed Auspine to resume delivering residue chip to ANM’s Boyer mill? There is, in my opinion, only one answer to that question: the truth was withheld from one or perhaps both managing directors. In particular, I find myself unable to believe Mr Humphrey’s assertion that he told Mr Ogilvie that Mr de Bruin was “adamant” about the use of Auspine’s Export specification.
At p 847ff of the transcript it was put to Mr Humphreys in cross-examination that ANM was “desperate” to get a resumption of deliveries of Auspine’s woodchips. He denied that his company was desperate but his denials did not impress me. The probabilities are that at the meeting of 9 June Mr Humphreys and Mr Bankes avoided the issue of identification of any specification but instead, proceeded on the understanding that Auspine would maintain the standard that had existed for the preceding twelve months. That standard (by whatever name called) had, with the occasional exception, been acceptable to the Boyer mill. Why then should there be a need to put a label on the standard just to satisfy the dictates of a managing director? Such an explanation would explain why there was little discussion, according to Mr Ogilvie, on the subject of the specification at the 9 June meeting. If this explanation is not the appropriate finding, one wonders how the parties could have come together and resumed their trading relationship in light of the diametrically opposed views of the two managing directors.
In his final submissions, counsel for Auspine pressed for a finding that there had been agreement that Auspine’s Export specification would be accepted; he submitted that the idea of a “hybrid” specification was “fanciful”. As I have made a finding that I prefer Mr Ogilvie’s evidence on this subject, it follows that it would be inconsistent for me to make a finding that Auspine’s Export specification was the applicable specification. Far from being fanciful, it is strongly arguable that the so-called hybrid specification was seen by Mr Humphreys and Mr Bankes as a practical solution to an otherwise insoluble problem.
The celebratory dinner was duly held, as planned, on 11 June 1995. Presumably, the parties were of one mind that the final terms of the agreement were virtually agreed upon and that it only remained for Mr Humphreys and Mr Bankes to work out the details. In fact those two gentlemen met in Hobart on 6 July along with Mr Jim Panagopoulos and Mr John Simpson where they discussed prices for chip and sawlog and exchanged their respective calculations (Ex A98A and Ex 100). Shortly thereafter, Mr Bankes wrote Mr Simpson of ANM on 26 July (Ex A105) setting out “matters to be incorporated into the agreement”. The six matters listed in that letter were:
“(1) Pricing of sawlog/woodchip to be reviewed every three months.
(2) Prices to be based on independently verified export pricing average calendar month preceding quarterly review.
(3) Chip quality to be based on export specification.
(4) Log specification as per supplied.
(5) Term of agreement to be agreed upon, suggest 3 years with annual review of volumes.
(6) Letter of agreement to be used in preference to formal legal agreement.”
Mr Bankes concluded his letter by saying:
“If you are prepared to accept the above in principle we can move to putting a letter of agreement into place whilst at the same time fine tuning the dollars.”
Counsel for ANM made much of the phrase “based on” appearing in the third point of Mr Bankes’ letter. That point could have read “Chip quality to be [Auspine’s] export specification”. The difference in terminology affords some support to the probability that there were attempts by members of each group to avoid the confrontation that would otherwise have arisen if either party had insisted on its specification being nominated as the approved specification. Interestingly, the expression “based on” appears a year later in a facsimile transmission from Mr Simpson to Auspine dated 25 July 1996 (Ex A237); and the same gentleman, earlier in September 1995 (Ex A129), referred to chip supply having been “structured on” export specification.
In his letter of 26 July 1995 (Ex A105) which was entitled “Strategic Alliance”, Mr Bankes also set out his “Assumptions” and “Calculations” which led Mr Simpson to submit an internal memorandum to Mr Humphreys on 3 August 1995 (Ex A110) describing the proposal for a “Strategic alliance” as an “insult”. Mr Simpson added that ANM should look at its options including its earlier attempt to block Auspine from making export sales. Once again, so it would seem, the parties were at loggerheads. But there was an early reversal of this trend. Mr Humphreys wrote Mr Bankes on 11 August 1995 (Ex A112) confirming the understanding of the parties with respect to various matters such as exchange rates, the chip export and sawlog prices, costs of money, cartage costs, a term of three years and so on. In terms of determining whether the parties had yet reached a concluded agreement, the following entries in that letter are relevant:
“... our arrangements will be documented by an exchange of letters.
Both chip and log specifications will be documented in these letters and will conform to our current understandings.
...
John Simpson will work with Jim Panagopoulos to determine the cost inputs for the initial deliveries which are scheduled for 14/8/95.”
Counsel for ANM was, to a degree, critical of this letter for, as he pointed out, it did not address what was to happen if components of the export price - such as cartage and port charges - were to change. However, I do not see how this omission can be cause for concern. There was no evidence that any components of the export price or of costs were altered in terms that brought disagreement between the parties. On the contrary, the evidence reveals that in the period of seventeen months - from August 1995 to January 1997 - the parties were able to maintain (in financial terms) a harmonious and consensual relationship. There is no point in speculating on what might have happened if at some stage in the seventeen month period the parties had found themselves unable to agree upon an issue of costing that had occurred as a result of some extraneous force. There were other criticisms of this letter by counsel for ANM but I will defer consideration of them until later in these findings.
Mr Humphreys, as the author of the letter, was asked to explain what he meant when he wrote that specifications will “conform to our current understandings”. I do not understand there to be any dispute about the log specification; it was put to Mr Humphreys and he agreed that it was the Forestry Tasmania specification (T876). As to the chip specification, Mr Humphreys was asked at the same page whether his “current understanding” was that which Mr Bankes had written in his letter of 26 July: Ex A105: ie “based on export specification” or whether he was referring to ANM’s Boyer mill specification. In answer, Mr Humphreys said the two were not mutually exclusive:
“... they would be based on export chip specifications and they would meet the requirements of the mill.”(T877)
I am sure that Mr Humphreys never informed his superior, Mr Ogilvie that he was - or had been - negotiating with Auspine in these terms. It is another indicator that Mr Humphreys was, indeed, “desperate” to effect a resumption of the supply of chips. This compromise was also advocated by Mr Simpson in his evidence:
“But the current understandings on what you have told us was that on the one hand Auspine was saying: Auspine export specification. On the other hand ANM was saying: Boyer Mill specification, and never the twain shall meet? --- No, not quite correct.
Was there something in between was there? --- Mr de Bruin was saying Auspine export specification. Mr Bankes was saying based on Auspine export specification. My understanding was that there would be a mutual agreement where the Auspine export specification and the Boyer requirements could be blended and merged with some change to make them fit.
Did you get that understanding from speaking with Mr Bankes or from Mr Humphreys telling you he had spoken with Mr Bankes? --- No, from Mr Bankes' correspondence.
I will show it to you so that we just get it correct. It is document 106 (sic) please, Mr Associate. I think if you look at the top of the second page is probably what you are referring to? --- Yes, it is.
So you saw that letter because it was in fact addressed to you? --- Yes.
And did you say to Mr Humphreys: well, what does he mean by based on export specification? --- No, I assumed that based on export specification meant that again there would be discussion between the two parties to come up with something that was mutually agreeable to both.
Well, you just assumed that did you? --- Yes.” [T1077]
(Exhibits A105 and A106 are each copies of the same letter from Mr Bankes dated 26 July 1995).
But this view was not commonly held: neither by ANM’s witnesses nor by Auspine’s witnesses. Mr Hingston of ANM said (T941) that it was his belief that the resumed deliveries were to meet the Boyer mill specification. Mr Hingston said he formed his belief from what he had been told either by Mr Humphreys or Mr Simpson. If indeed one or other of them said that to Mr Hingston, it would be a contradiction of their evidence to which reference has just been made. In his affidavit that was affirmed on 16 May 1997 and read as part of his evidence in chief, Mr Hingston stated that he was employed by ANM as a Harvesting Supervisor. He said that his duties meant that he was “responsible for supervising and managing the supply of wood based products for processing at ANM’s Boyer mill ...”. He also said that he reported to Mr John Simpson.
Mr Bankes said (T183) that it was his belief that an agreement had been put in place upon his receipt of Mr Humphreys’ letter of 11 August 1995 (Ex A112). He said “that the specification for chip had been agreed as being the Auspine Export specification” (T183). He emphasised that point by saying that it had been agreed on the occasion of the meeting of 9 June. I do not accept that passage of Mr Bankes’ evidence. Just as I have rejected Mr Humphrey’s statement that the Boyer mill specification was discussed and agreed because of my preference for Mr Ogilvie’s evidence, so also I reject Mr Bankes’ evidence on the same ground.
Mr Plummer said (T280) that at the meeting on 9 June the parties agreed to accept Auspine’s Export specification. I must reject his evidence on this subject in preference to that of Mr Ogilvie. In coming to this conclusion, I have had regard to the fact that there was a period of approximately seventeen months from August 1995 to January 1997 during which Auspine delivered residue chip to ANM at its Boyer mill. An examination of the documentary evidence discloses that throughout that period there were many complaints by ANM about the quality of the residue chip that Auspine was supplying. Although those complaints were not couched in specific terms that the chip did not meet the Boyer mill specification, the evidence of Mr Mathys, the manufacturing manager at the Scottsdale mill, and Mr Young acknowledges that Auspine was endeavouring to supply chip to a specification that was higher than Auspine’s Export specification. In those circumstances it would be inconsistent to accept that there was agreement reached between the parties at the meetings in June 1995 that Auspine’s Export specification would be the relevant specification for the purposes of the residue chip.
AUGUST - DECEMBER 1995
Despite the fact that there were matters that had been left outstanding, Auspine did recommence deliveries of residue chip to ANM at its Boyer mill on 14 August 1995 as contemplated in Mr Humphreys’ letter of 11 August. Although ANM admits the resumption of deliveries, it denies that they had the effect contended for by Auspine.
On 23 August, Mr Panagopoulos wrote Mr Simpson (Ex A116) setting out information concerning exchange rates, chip export prices and production schedules. It was Auspine’s case, according to its counsel in his opening, that this information completed “the picture in relation to all matters that had to be agreed” (T79). Exhibit A125 is an internal memorandum from Mr Simpson to other employees in ANM advising them that there was an agreed price for Auspine’s chips at $56.13 per tonne effective from “their deliveries in August”. The employees were asked to use that rate and to prepare a retrospective payment for earlier deliveries that had been costed at a lower rate. I find that this memorandum is evidence that justifies a finding that the parties had agreed the initial price for Auspine’s residue chip. The memorandum is also very significant in that it contradicts Mr Humphreys’ earlier advice to Mr Bankes in his letter of 23 March 1995 (Ex A55) that existing prices “will continue until heads of agreement are signed”. Heads of agreement had not been signed at that stage yet ANM was prepared to make the higher payments. ANM’s conduct suggests that its earlier requirement that heads of agreement be signed was not of material importance to it.
But trouble was not far away. On 29 August 1995, fifteen days after the resumption of deliveries, the pulp mill superintendent at Boyer sent an internal memorandum to Mr Simpson with a copy to Mr Hingston complaining about the quality of the chips being supplied. The superintendent said:
“Until [Auspine] can change their operation to comply with our specs, we can no longer accept their chips.”
I regard this note as important for two reasons; first, it suggests that the superintendent, like Mr Hingston, had been given to believe that future deliveries would meet the Boyer mill specification; secondly, it suggests that Auspine considered that it had succeeded in having the standard of the chips reduced - if not to its export specification, then at least, to a standard less than that to which it had adhered in the preceding twelve months.
Mr Young of Auspine said in evidence that he spoke by phone with Mr Simpson on 1 September 1995 with respect to the quality of the residue chips that Auspine was supplying. He said:
“Mr Simpson was expressing some concern as to the specification. I reiterated in that telephone conversation that the agreement that was reached on the 9 June was an export softwood chip specification and that I would supply him a copy of that specification if he did not already have one, which he advised me he didn't, and accordingly I wrote the letter with the accompanying specification which I sourced from our export division.” [T330]
Based on that telephone conversation Mr Young forwarded a copy of the specification under cover of a facsimile transmission dated 4 September 1995: Ex R119. Mr Young concluded his transmission to Mr Simpson with the words:
“After I have spoken to the site management, I will revert on the issues raised.”
In cross-examination (T343) Mr Young said that “the issue” to which he referred in his transmission was that relative to “the complaint of the specification for the chip quality being supplied to Boyer Mill.”
Mr Young was present at the meeting on 9 June but he was not present at the earlier meeting of 2 June. The positive manner in which he expressed himself about the applicability of Auspine’s Export specification places him in direct conflict with Mr Ogilvie. Either Mr Young was attempting deliberately to mislead the Court or he now genuinely thinks that agreement had been reached that Auspine’s Export specification had been accepted. I do not believe that Mr Young attempted to mislead the Court but I do incline to the view that he, like some other witnesses, has engaged in an exercise of ex post facto rationalisation. I believe that he has convinced himself that the parties did agree to Auspine’s Export specification.
Mr Simpson, upon receiving Mr Young’s facsimile (Ex R119), forwarded it to a Mr Ernie Hacker asking him to “advise on acceptability and if not what needs to change”: Ex A120. On 8 September Mr Simpson received a reply to his inquiry informing him that Auspine’s Export specification was not acceptable for use in the Boyer mill.
Meanwhile, Mr Simpson wrote Mr Panagopoulos on 11 September confirming the figure of $56.13 as the revised price per tonne for residue chip. He said:
“that the agreed export parity rate for Auspine’s woodchips ex the Scottsdale mill will be $56.13. During the period when supply started and before the rate was finalised I had been using $38 per tonne; therefore the difference between $56.13 and $38 will be made up through a retrospective payment”.
But Mr Simpson also complained again about the quality of the woodchip in his letter of 11 September 1995. Mr Panagopoulos was in the Management Resource division of Auspine and Mr Simpson knew that he did not have any control over the quality of the woodchip that was produced at the Scottsdale mill. Even so, Mr Simpson was writing him on some issues of pricing and used that opportunity to voice his concerns about the quality of the chips. He said that there were oversized chips as well as a high level of fines and sawdust that blocked the refiners and reduced the pulp strength. He said that, as an interim measure, ANM was re-screening the deliveries at Boyer but that there were practical and financial limits on that exercise.
Mr Simpson’s letter of 11 September had also come to the attention of Mr Bankes. He wrote a note on it addressed to Mr Panagopoulos:
“Jim, Price review due 1st Nov - please do review and also put together letter of agreement.”
It cannot therefore be said that the question of an agreement or an exchange of letters had been wholly overlooked by Auspine. Rather, so it would seem, neither party was overly concerned to attend to this matter. In particular, it must be noted that ANM had been accepting deliveries of residue chip since 14 August and paying for them but had made no request since that date for an exchange of letters.
Then came a surprising document from Mr Simpson. He wrote Mr Panagopoulos on 18 September 1995 (Ex A129) saying:
“While I appreciate and accept that the discussions over chip supply and price between Auspine and ANM have been structured on export parity and export specification it is now obvious that the export specification does not fit with Boyer’s refining process.”
Mr Simpson’s explanation (T1093) was that Mr Young of Auspine, having made a specific request to ANM that it accept Auspine’s Export specification and having sent ANM a copy of that specification, (Ex A119), he (Mr Simpson) was merely replying that Auspine’s Export specification did not “fit with Boyer’s refining process”. This would have been a logical explanation were it not for the reference in Mr Simpson’s letter to his appreciation and acceptance that “the discussions over chip supply ... have been structured on ... export specification ...”. This passage establishes, in my opinion, that in September 1995 ANM knew and accepted that Auspine was not supplying chip to the Boyer mill specification. That finding does not mean that Auspine were supplying to its Export specification. In fact, the evidence points to Auspine doing everything within its power to upgrade the quality of its chip above the standard of its Export specification. Mr Simpson’s reference to the chip supply being “structured” on Auspine’s Export specification, like Mr Bankes’ turn of phrase “Chip Quality to be based on export specification” would support a the finding that a compromise was struck - probably between Mr Humphreys and Mr Bankes (and without reference to their respective managing directors) at or about the time of the meeting of 2 June 1995. On the balance of probabilities, I find that the parties to that compromise were Mr Humphreys of ANM and Mr Bankes of Auspine. Neither of these gentlemen acknowledged specifically that they had been a party to any such arrangement and I am, of course, well aware, that the conclusion that I have reached means that I regard each of them as having withheld material information from the Court when giving their evidence - Mr Bankes more so than Mr Humphreys. One comes to such a conclusion in a commercial cause with reluctance and I have pondered long, seeking an alternative explanation. I have not been able to find it. I cannot say that Mr Simpson was also a party to the compromise but I can say that Mr Ogilvie and Mr de Bruin most definitely were not. Although Mr de Bruin was called as a witness in the applicant’s case, he added little to what has already been noted. Despite coming in “over the top” and his attendance at the 2 June meeting and 11 June dinner, he did not play a great part in the on-going discussions between the parties.
Mr Simpson said in evidence that the rescreening that ANM felt compelled to carry out in September 1995 only lasted two to three weeks because thereafter the quality of the woodchip that Auspine delivered to the Boyer mill “had started to improve” (T1106). He was then asked in cross-examination whether the chip quality remained the same from then until December of that year. He said that it was “very hard to say” but he agreed that nothing stood out “as to the changing quality of chip between that point of time and December” (T1107).
In maintaining that the residue chip that Auspine was required to deliver to the Boyer mill had to meet ANM’s Boyer mill specification, ANM relied upon the following assertions in par 9C of its defence:
· The residue chip was, to the knowledge of Auspine, purchased by ANM for use in paper manufacture at the Boyer mill;
· The Boyer mill used a thermo-mechanical process for which only chip of the grade, size and geometry specified in the Boyer mill specification was suitable;
· In September 1994 ANM sent a copy of the Boyer mill specification to Auspine;
· From September 1994 onwards, Auspine sent ANM a daily report which purported to show the results of tests carried out on the chip supplied by Auspine for compliance with the Boyer mill specification;
· From September 1994 onwards, ANM, to the knowledge of Auspine, also tested the residue chip that had been delivered by Auspine for compliance with the Boyer mill specification;
ANM further pleaded in par 9D of its defence that ANM had made known to Auspine thatthe residue chip required was for use in paper manufacture at the Boyer mill “so as to show that the Respondent relied on the Applicant’s skill and judgment”. In its reply, Auspine admitted that it knew ANM’s purpose but denied that ANM had relied on Auspine’s skill and judgment, pointing to the fact that since September 1994 and onwards ANM had tested the delivery of residue chip in order to satisfy itself that the chip was satisfactory; Auspine therefore claimed that ANM relied on its own skill and judgment
In par 9E of its defence, ANM pleaded that it was a term “of whatever contract was in force” that the residue chip would meet the Boyer mill specification or, alternatively, would be reasonably fit for use in the manufacture of paper at the Boyer mill. Predictably, Auspine denied the application of the Boyer mill specification and, strangely, denied that it was a term of the agreement that the residue chip would be reasonably fit for use in paper manufacture. Auspine knew, and had known since 1987, that ANM was using its chip for paper manufacture. Auspine knew that ANM would not be interested in that chip unless it was capable of being so used. Putting to one side the question of the identification of the correct specification, Auspine knew, and I find that it knew, that ANM relied on it to present chip that would be suitable for paper manufacture. This conclusion is, in part, borne out in Auspine’s alternative plea in par 5.4 of its reply where it says that:
“in any event residue chip supplied by the applicant was reasonably fit for use in the manufacture of paper and/or paper products at the Boyer Mill.”
THE SPECIFICATION
I reject Auspine’s basic claim that it was a term of any agreement that it had with ANM that it would supply residue chip to Auspine’s Export specification. But I also reject ANM’s like basic claim that its Boyer mill specification was the agreed specification.
Having rejected the evidence of both parties that their respective specification was the appropriate specification and there being no direct evidence that the parties had agreed on some hybrid specification, the question then is whether such a term can be implied into their agreement.
The circumstances in which a Court can imply terms into the contractual arrangements of parties to a disputed agreement were considered by Lord Simon when delivering the decision of the majority of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282-83:
“Their Lordships do not consider it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”
The High Court has accepted this statement as authoritative: see Carter and Harland, Contract Law in Australia, 3 ed. 1996 at 205, Secured Income Real Estate (Australia) Ltd v St Martin’s Investments Pty Ltd (1979) 144 CLR 596 at 605-06 and Codelfa Construction Pty v State Rail Authority of New South Wales (1982) 149 CLR 337. It has also been accepted that these requirements are particularly “strict” or “stringent”: Wright v TNT Management Pty Ltd (1989) 85 ALR 442 at 459, and as Carter and Harland point out, perhaps overly so (supra at 206). However, as Deane J stated in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 121, those cases that have approved the criteria which must be satisfied before a term will be implied in a contract, like the BP Refinery Case itself, were concerned with the question whether a term should be implied in a formal contract which was complete upon its face. His Honour went on to say:
“…care should be taken to avoid an over-rigid application of the cumulative criteria which they specify to a case such as the present where the contract is oral or partly oral and where the parties have never attempted to reduce it to complete written form.” (at 121)
Deane J re-affirmed those sentiments in Hawkins v Clayton (1988) 164 CLR 539 at 571. His Honour also said additional terms would be less easily implied in a formal, written contract by virtue of the fact that:
“In such cases, the insertion of an additional term effectively involves an alteration to what the parties have formally accepted as the complete written record of the compact between them. As the judgment of Mason J. in Codelfa (1982) 149 CLR at pp345-347 (Stephen and Wilson J. concurring with his Honour’s comments on this aspect of the case) clearly indicates, the cumulative criteria formulated or accepted in such cases cannot be automatically applied to cases such as the present where the parties have not attempted to spell out all the terms of their contract but have left most or some of them to be inferred or implied. Where that is so, there is no question of effectively altering the terms in which the parties have seen fit to embody their agreement; the function of a court is, as Lord Wilberforce pointed out in Liverpool City Council v Irwin [1977] AC 239 at p 254: “simply…to establish what the contract is, the parties not having themselves fully stated terms.” In the performance of that function, considerations of what is “reasonable”, “necessary to give business efficacy to the contract” and “so obvious that ‘it goes without saying” … may be of assistance in ascertaining the terms which should properly be implied in the contract between the parties. There will not, however, be the need or the justification for the law to refuse to imply any imputed term which does not clearly satisfy all such requirements. This is particularly so where, as here, the contract has passed from the executory state and has been executed by one or both parties.” (at 571)
His Honour also said that a mechanical test for determining what terms, if any, should be implied in a case where the parties have sought to spell them out:
“…would introduce an element of inflexibility which would be likely to lead to injustice in the circumstances of particular cases…The most that can be said consistently with the need for some degree of flexibility is that, in a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, a court should imply a term by reference to the imputed intention of the parties, if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case. That general statement of principle is subject to the qualification that a term may be implied in a contract by established mercantile usage or professional practice or by a past course of dealing between the parties.”(at 572-573)
Similarly, in Byrne v Australian Airlines (1995) 131 ALR 422 the High Court considered whether terms could be implied by reference to the imputed intention of the parties. In that case the appellants were employed as baggage handlers at Sydney Airport. They were dismissed from their employment for pilfering. They sought relief in the Federal Court, claiming that the termination of their employment was in breach of the relevant provision (clause 11) of the Transport Workers (Airlines) Award 1988 (the award) prohibiting the harsh, unjust or unreasonable termination of an employee by an employer. The appellants appealed to the High Court against the rejection by the Full Court of the Federal Court of their claims for damages. They submitted that clause 11 was an implied term of their employment contracts. Their Honours Brennan CJ, Dawson and Toohey JJ approved the test posited by Deane J in Hawkins v Clayton as an appropriate test to apply to the implication of terms into a contract, the terms of which were not formalised. Nevertheless, their Honours held that it was not necessary to imply a term in the form of cl 11 of the award for the reasonable or effective operation of the contract of employment.
Similarly McHugh and Gummow JJ stated:
“…where the contract is not in writing and is oral or partly oral or it appears that the parties themselves did not reduce their agreement to a complete written form, caution is required against an automatic or rigid application of the cumulative criteria identified in BP.” (at 443-444).
Their Honours considered the task of determining the implication of terms as first requiring a consideration of the evidence to determine the relevant express terms as well as terms which may be implied by established custom or usage. Other terms may be implied where they are so obvious they go without saying. Finally, referring to Hawkins v Clayton, their Honours said:
“If the contract has not been reduced to complete written form, the question is whether implication of the particular term is necessary for the reasonable or effective operation of the contract in the circumstances of the case; only where this can be seen to be true will the term be implied.”(at 444)
McHugh and Gummow JJ agreed with the majority that clause 11 could not be implied in the appellants’ employment contracts as a matter of business efficacy. It could not be considered necessary for the reasonable and effective operation of those contracts, nor could it be considered a term so obvious that it would go without saying.
However, even in the case of informal arrangements, a term will only be implied if it is necessary (see Hospital Products Ltd v United State Surgical Corp (supra)) to make the contract effective in a business sense (see Carter and Harland (supra at p206)). If the contract is effective in the absence of the term, it should not be implied: Australian Meat Industry Employees’ Union v Frugalis Pty Ltd [1990] 2 Qd R 201.
A leading case on the question of commercial efficacy is The Moorcock (1889) 14 PD 64. In that case, the plaintiff’s vessel was damaged when moored at the defendants’ jetty. It was moored by agreement with the defendants for the purpose of its loading and unloading. It was usual (and indeed it was contemplated by the parties) for the vessel to rest on mud at the bottom of the River Thames during low tide. However, on one occasion this practice caused damage to the vessel and the plaintiff claimed compensation. The Court of Appeal held that a term had to be implied into the contract imposing an obligation on the defendants to see that the bottom of the river was reasonably fit, or to exercise reasonable care in determining its condition, and to advise the plaintiff thereof. Bowen LJ said:
“In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men; not to impose on one side all the perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils or chances.”(at 68)
By virtue of the fact that the parties knew the vessel would rest on the bottom it was clear that the business could not be carried on unless there was an implication that the river bottom was safe, and that the defendants had assumed responsibility for the state of the river. It followed that the plaintiff was entitled to damages for breach of contract.
The factors to be taken into account by a court in determining the implication of additional terms must also be viewed in light of the court’s duty when assessing the legal efficacy of commercial arrangements between two or more parties generally. The statement of Gibbs CJ, Murphy and Wilson JJ in Booker Industries Pty. Ltd v Wilson Parking (Queensland) Pty Ltd (1982) 149 CLR 600 is a useful starting point:
“It is established by authority, both ancient and modern, that the courts will not lend their aid to the enforcement of an incomplete agreement, being no more than an agreement of the parties to agree at some time in the future.” (at 604)
Indeed, imprecision and vagueness of contractual terms often indicates that the parties have not yet agreed to be bound: Scammell v Ousten [1941] AC 251, Farmer v Honan (1919) 26 CLR 183. However, regard may also be had to the statement of Lord Wright in Hillas & Co v Arcos Ltd (1932) 147 LT 503 at 514:
“The document…cannot be regarded as other than inartistic, and may appear repellant to the trained sense of an equity draftsman. But it is clear that the parties both intended to make a contract and thought they had done so. Business men often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is accordingly the duty of the court to construe such documents fairly and broadly, without being too astute or subtle in finding defects; but, on the contrary, the court should seek to apply the old maxim of English law, verba ita sunt intelligenda ut res maglis valeat quam pereat. [Words are to be understood such that the object may be carried out and not fail]. That maxim, however, does not mean that the court is to make a contract for the parties, or to go outside the words that they have used, except insofar as there are appropriate implications of law, as for instance, the implication of what is just and reasonable to be ascertained by the court as a matter of machinery where the contractual intention is clear but the contract is silent on some detail.”
The other members of the House of Lords expressed themselves in a similar fashion.
Likewise, in Hawkins v Clayton (supra at 572), Deane J propounded the proposition that in assessing contractual arrangements between parties, the courts must observe Lord Tomlin’s “sensible admonition” in Hillas & Co. Ltd v Arcos Ltd. That admonition was for the Courts:
“so to balance matters, that without violation of essential principle the dealings of men may as far as possible be treated as effective and that the law may not incur the reproach of being the destroyer of bargains.”(at 512)
In Vroon BV v Foster’s Brewing Group (1994) 2 VR 32 Ormiston J said:
“I would accept that in commercial transactions the court should strive to give effect to the expressed arrangements and expectations of those engaged in business, notwithstanding that there are areas of uncertainty and notwithstanding that particular terms have been omitted or not fully worked out.” (at 67)
His Honour then referred to the judgment of Bingham LJ in Didymi Corp. v Atlantic Lines and Navigation Co. Inc [1988] 2 Lloyd’s Rep. 108 where his Lordship quoted and approved the remarks of Lord Denning MR in F & G Sykes (Wessex) Ltd v Fine Fare Ltd [1967] 1 Lloyd’s Rep 53 at 57:
“In a commercial agreement the further the parties have gone on with their contract, the more ready are the courts to imply any reasonable term so as to give effect to their intentions. When much has been done, the courts will do their best not to destroy the bargain. When nothing has been done, it is easier to say there is no agreement between the parties because the essential terms have not been agreed. But when an agreement has been acted upon and the parties, as here, have been put to great expense in implementing it, we ought to imply all reasonable terms so as to avoid any uncertainties.”
Finally Ormiston J stated:
“I would accept that in those circumstances where the court is satisfied that the parties have reached agreement, judged by objective standards, then it should be more generous in giving effect to what is necessary to achieve business efficacy and the parties’ intentions, although their communications may have had an air of uncertainty and incompleteness about them.”(at 71)
The court must, of course, be mindful that its role in giving effect to the commercial efficacy of business arrangements is a limited one: see Kirby P in Custom Credit Corporation Ltd v Cenepro Pty Ltd (unreported, C.A. (NSW) 7 August 1991) where his Honour said: "There are, of course, limits. They arise where, to an unacceptable extent, the parties have themselves failed to agree upon essential terms.” Nevertheless, there are incontrovertible facts in this case which, so I apprehend, fully justify the implication of a term that the chip that was to be supplied by Auspine to the Boyer mill would be fit for use in the Boyer mill. The more important and obvious of those facts are as follows:
· there had been an ongoing business relationship between the parties since 1987;
· Auspine knew that the Boyer mill was used to produce paper and paper products;
· Auspine knew that the chip that ANM used at the Boyer mill (irrespective of the source of the chip) had to be suitable for use in that mill;
· Auspine knew that its Export specification was not suitable for use in the Boyer mill;
· Auspine had, in the period 1987 to April 1995, supplied chip to the Boyer mill well knowing that on occasions the chip delivered had been rejected but also well knowing that for the most part its loads were accepted;
· Auspine tried unsuccessfully to negotiate a term that its Export specification would be accepted and equally ANM sought unsuccessfully to impose its Boyer mill specification.
In the face of those facts and in the knowledge that, for the most part, the parties were able to trade throughout the seventeen months to January 1997, one is justified in implying that there was a compromise struck on the subject of chip specification.
To imply a term that the woodchip would be suitable for use in the Boyer mill is, in my opinion, reasonable and equitable; it is also necessary to give business efficacy to the contract - the contract would not be effective without it. The term is obvious in the sense that there must be an agreed quality with respect to the chip; it is capable of clear expression and it does not contradict any express term. In other words, each of the five conditions identified by Lord Simon have been satisfied.
I make the following findings of fact on this subject:
· Prior to the commencement of deliveries of residue chip in August 1995 Auspine had made it known to ANM that it would only deliver residue chip to its (Auspine’s) Export specifications. There is an abundance of evidence to support this conclusion and much of it has been noted in these reasons. It is sufficient for present purposes to note that Mr Humphreys conceded that at the meeting of 2 June, Mr de Bruin was “adamant” on the topic. I do not accept Mr Humphreys’ evidence (T 861) that he told Mr de Bruin that ANM would only accept its Boyer mill specification.
· Prior to the commencement of deliveries of residue chip in August 1995 ANM had made it clear that the residue chip had to satisfy the higher standard required by the Boyer mill: ie, the residue chip was to meet the Boyer mill’s specification. I particularly rely on Mr Ogilvie’s evidence on this subject, for as I have said, I found him a very impressive witness.
· Because of the intractable views of their respective managing directors, it became necessary for senior officers in the two business-houses to work out some compromise.
· That compromise became apparent from the evidence of Mr Simpson during his cross-examination at T1077 when he referred to the blending and merging of the two specifications.
· “Basing” the quality on Auspine’s Export specification saved face all round. Each party had given a little but neither had capitulated.
· Based particularly on the evidence of Mr Mathys, throughout its relationship with the Boyer mill, the Scottsdale mill endeavoured to increase its standards so that the chip that was delivered to the Boyer mill would be suitable for processing at that mill.
· Auspine never conceded that it would supply chip to the Boyer mill’s specification and, quite often, the chip that it supplied did not meet that specification. Nevertheless, with some exceptions, the chip that it supplied was mostly sufficient for ANM’s purposes.
· In some cases that sufficiency was only achieved as a result of rescreening.
· Until late 1996, ANM had a need for Auspine’s chip and was, with exceptions, prepared to accept it and use it notwithstanding that it did not meet the Boyer mill specification. (The facts justifying this particular finding are discussed later when considering a confidential report (Ex R270) that ANM commissioned).
In Mr Humphreys’s letter to Mr Bankes dated 11 August 1995 (Ex A112), to which reference has already been made, Mr Humphreys had set out his “understanding” of what the parties had agreed and of what was yet to be resolved. There had been no immediate reply to that letter, but it is a fact that Auspine resumed deliveries of residue chip to ANM’s Boyer mill on 14 August 1995. I find that, in so doing, Auspine was thereby accepting those terms as were identified in Mr Humphrey’s letter. On 13 December 1995 Mr Bankes wrote Mr Simpson: Ex R145. Although he made no specific reference to Mr Humphreys’ letter of 11 August 1995, he did commence his letter by saying:
“Following previous correspondence and the continuing supply of woodchip to ANM from 14 August 1995 we re - confirm the following:”
Thereafter, Mr Bankes listed a series of terms which, when compared with the contents of Ex A112, strongly suggest that he had a copy of Mr Humphreys’ letter before him as he wrote his letter. Many of the terms in Mr Bankes’ letter were virtually identical to those in Mr Humphreys’ letter; in other cases there were variations. Some of those are explainable by virtue of the acquisition of additional information and others were merely grammatical. Variations that were important included the following matters:
· Mr Humphreys had written that “chip and log specifications will be documented”. Mr Bankes wrote “Woodchip and log specifications as attached”, and a copy of Auspine’s Export specification was attached.
· Mr Humphreys had said that the parties would supply each other with “predicted annual volumes of both chips and sawlogs ...” Mr Bankes wrote that the annual volume of woodchip for the first year was estimated at up to 90,000 tonnes and noted that ANM had yet to supply its estimate of sawlog availability.
· Mr Bankes added a new item by specifying that “Price determination to be on a quarterly basis commencing 1 August 1995.” (That this particular term was accepted by ANM is evidenced by its participation in subsequent quarterly reviews).
Mr Humphreys was cross-examined about the contents of Mr Bankes’ letter of 13 December 1995 to Mr Simpson. He had read it and rang Mr Bankes about it sometime early in January 1996. In his affidavit that was affirmed on 16 May 1997 for use in these proceedings Mr Humphreys claimed that in his conversation with Mr Bankes he said words to the effect:
“I have seen your letter to John Simpson of 13 December 1995. We still have the problem of the chip specification. I understand that John Simpson has previously informed you that Auspine’s export specification does not suit Boyer’s refining process. The people best able to work this out are the technical people at Boyer and your saw mill people. They are working on it. I think we should keep persevering.”
The fact that Mr Humphreys is prepared to acknowledge that he made such a statement is significant. At the core of this dispute we have ANM saying that it was agreed that any deliveries from Auspine’s Scottsdale mill to ANM’s Boyer mill must meet ANM’s specification whilst Auspine claims that the required specification was its (lower) Export specification. If the correct specification was the Boyer mill specification why were the parties still discussing Auspine’s Export specification four months later in December? Why was there a need for the parties to persevere? What were the technical people to work on? The most likely answer is that, as I have found, it had never been agreed that Auspine would meet the Boyer mill specification nor had it been agreed that it would deliver to its Export specification. I find that what had been agreed and what remained as the parties agreement in December 1995 was the compromise to which reference has already been made. The problem of chip specification to which Mr Humphreys referred in his affidavit was not a problem of identifying the correct name of the specification; it was a problem of making sure that the residue chip that was supplied would be of a sufficient quality that it could be used in the Boyer mill.
The history of this matter - Mr Humphreys’ concession that Mr de Bruin was adamant that the specification be Auspine’s Export specification and Mr Ogilvie’s evidence that he would have erupted at such a suggestion - portrays an irreconcilable dispute between the two companies unless, of course, someone engineered a compromise. Mr Humphreys must have known of his managing director’s vehement attitude against accepting Auspine’s Export specification. Unless some compromise had been worked out, the least he would have said to Mr Bankes in January 1996 would have been a stern reminder that Auspine’s Export specification had never been accepted. If, on the other hand, Mr Humphreys had earlier agreed with Mr Bankes, in order to bring the parties together so that deliveries of woodchip could resume, to accept a specification that was higher than, but “based on” or “structured on” Auspine’s Export specification, it would be understandable for him to remind Mr Bankes that the Export specification did not suit Boyer’s refining process but that all parties “should keep persevering”. It is, of course, inconsistent with this finding that Mr Bankes should have submitted a copy of Auspine’s Export specification with his letter of 13 December but that does not dissuade me from adhering to the conclusion that I have reached that there had been a compromise achieved between Mr Humphreys and Mr Bankes - probably sometime shortly after the meeting of 2 June but, in any event, before the meeting of 9 June 1995.
Although a literal reading of Mr Humphreys’ letter of 11 August 1995 (Ex A112) and Mr Bankes’ letter of 13 December 1995 (Ex R145) suggests that there were matters that were still outstanding, I am of the opinion that even before Mr Bankes’ letter the parties had, by one means or another, actually agreed all matters. I have made my finding on the vexed issue of the specification - I have found that agreement had been reached on that subject. I have found that the resumption of deliveries by Auspine constituted its acceptance of the terms stipulated in Mr Humphreys’ letter of 11 August 1995 (Ex A112). I further find that the trading history of the two companies, commencing with the resumption of deliveries on 14 August 1995 and continuing up to and beyond the date of Mr Bankes’ letter establish that the parties had achieved agreement on pricing, costing and reviews of pricing and costing. There may have been areas of uncertainty but for reasons that I will discuss in due course, I do not consider them to have had material importance.
THE FIRST VARIATION - 8 DECEMBER 1995
It was common ground that there was a material change in the parties relationship in December 1995. Auspine described the change in its statement of claim as “the first variation” to the 1995 agreement and particularised it by claiming that ANM stated that it would, with effect from 2 January 1996, only accept twelve loads of residue chip per day on week days and five loads on a Saturday; subject to that, ANM would not be obliged to accept any residue chip in excess of those quantities. ANM admitted those changes but, consistent with its denial that there was a 1995 agreement, it denied that the change was a variation to an existing agreement. Mr Hingston said in evidence that 22 loads per day from all sources was the maximum capacity of the Boyer mill and that commitments to others meant that the mill could only accept 12 loads per day from Auspine (T 947).
A meeting was held in Launceston on Friday 8 December 1995 between representatives of Auspine, ANM and “Lloyds North”, the transport company that was used to cart the residue chip from Scottsdale to the Boyer mill. Mr Leigh Mathys. the manufacturing manager at the Scottsdale mill and a Mr John Thyne represented Auspine; Mr David Smyth, the harvesting supervisor, and Mr Paul Hingston attended on behalf of ANM. Exhibit A142 is a copy of a report of that meeting as compiled by Mr Smyth and submitted to Messrs Humphreys, Simpson and Hingston. Exhibit A146 is a copy of the report that Mr Mathys submitted to Mr Michael Young with respect to the same meeting. Both men reported that the meeting had discussed the difficulties that were caused by Auspine’s inconsistent production runs. On some days it might be as low as six loads and on others as many as twenty two. Mr Mathys’ reported that ANM’s capacity at Boyer was twelve loads per day because of inadequate unloading facilities. Mr Smyth’s note was expressed differently:
“It is mutually agreed that twelve loads/day Monday - Friday and 5 loads when Saturdays are worked will go to Boyer, assuming that chip production is relatively consistent
This arrangement to commence from 2/1/96. Production in excess of these figures Auspine will be responsible to sell elsewhere.”
Mr Mathys was concerned; he reported that in a twenty one day period, the Scottsdale mill had averaged fourteen loads a day and its budget was fifteen. He asked: “what do we do with the surplus?”. He concluded his report by saying that ANM would endeavour “to take all chips” but consistently with Mr Smyth’s report he noted that “any surplus is to be of Auspine’s responsibility”. It is appropriate to mention at this stage, that I was impressed by Mr Mathys as a witness. He gave his evidence openly and without favour. His employment with Auspine had recently ended in circumstances that were not disclosed. But he did not take sides; I found his evidence wholly acceptable in every respect. Although he was employed by Auspine at the relevant time, I do not consider that he allowed that factor to influence his evidence. He gave me the impression that he was, at all times, open and honest. His recent departure from Auspine did not seem in any way to affect the calibre of his evidence. For example, he said, (T389) and I accept, that the Scottsdale mill was attempting to meet ANM’s specification even though, as he acknowledged, his instructions were to supply woodchip that complied with Auspine’s Export specification (T386). He was quite open about the efforts at Scottsdale to accommodate ANM and made it clear that Mr Michael Young, the manager of the division to whom he reported, knew of these efforts. Mr Young supported this evidence. On the one hand, Mr Young maintained that Auspine’s Works Procedure Manual throughout 1995 required compliance with Auspine’s Export specification - not ANM’s Boyer mill specification - (T344), yet on the other hand he acknowledged that he had asked Mr Mathys “to try to achieve the specification ANM required” (T347).
Some support for the proposition that Auspine were attempting to supply chip to a standard that was higher than its own Export specification is to be found in the evidence of Mr Noakes. Mr Noakes, an expert in the Timber industry who now carries on business as an independent consultant, has been involved in differing aspects of the industry since 1982. In giving evidence on behalf of Auspine he expressed the view that an analysis of samples suggested to him that “in recent times” chips delivered by Auspine to the Boyer mill “have closely approximated the ANM specification” (Ex A292). He considered that there was an oversupply of the “plus 1/8 inch class” amounting to an extra 0.6 per cent approximately of the total quantity of chip delivered but he regarded the chip that had been delivered since the end of September 1996 as suitable for processing “in some manner at the ANM Boyer mill, particularly if blended with chip from other sources”.
Even though the parties had earlier agreed during the course of their negotiations that ANM would take all Auspine’s chip, it seems that, as a matter of commercial practicality, at the meeting of 8 December 1995, Auspine accepted the reduced number of loads.
As I have earlier said, Mr Bankes had written Mr Simpson on 13 December 1995 purporting to confirm the parties’ arrangement. It is curious that Mr Bankes should write his letter, (Ex A145) to Mr Simpson on the same day as Mr Mathys was reporting to Mr Young, that at a meeting five days earlier, ANM’s representatives were reported as saying that ANM would not commit itself to incur the costs of a storage pad “due to no contracts being signed”. Perhaps Mr Bankes was thereby alerted to an apparent oversight: perhaps he realised that Mr Panagopoulos had not acted on his note to the letter of 11 September (Ex A128). Whatever may be the explanation for this particular hiatus, I am convinced that Auspine would not have resumed deliveries in the preceding August unless it was then satisfied that there was - or that there was imminently about to be - a suitable arrangement in place between the parties. What should not be overlooked, is that Auspine had earlier terminated deliveries to ANM and had made suitable business arrangements with North Forest Products to enable it to commence deliveries to its new customer’s Burnie facility. It also had received a draft agreement from Mitsubishi. It was not likely to throw all that away - as it did - unless it was satisfied that it was about to have a firm arrangement in place with ANM. The nature of that arrangement and its legal effect on the parties is yet to be discussed.
JANUARY - MAY 1996
There was another meeting at Launceston on Tuesday 8 January 1996 between Messrs Thyne and Mathys of Auspine and Messrs Smyth and Hingston of ANM. One item that was discussed was the difficulty confronting Auspine in storing chips as a result of ANM limiting itself to twelve loads per week day. Mr Smyth’s note of that meeting (Ex A149) contains the following entry:
“Chip Storage
Leigh (Mathys) estimated a chip storage pad at Auspine should cost $120,000.
ANM have offered to pay 50% of the construction. The logical method covering the term of the chip agreement, on a rate/tonne basis.”
Mr Humphreys said in evidence that this offer by ANM had been made on the authority of Mr Simpson. The offer was repeated in Mr Simpson’s facsimile transmission to Mr Young on 14 February (Ex A159) when he said:
“ANM will reimburse 50% of the construction cost on an agreed rate per tonne of delivered chips over the term of the supply agreement between our respective companies.”
ANM’s conduct in February in offering to participate in meeting the costs of a storage pad is in sharp contrast with the reports, two months earlier that ANM would not commit itself “due to no contracts being signed”. An immediate explanation might be the receipt of Mr Bankes’ letter of 13 December in the intervening period. Perhaps ANM then saw that letter as the completion of the exchange of letters.
ANM commenced delivering sawlog to the Scottsdale mill for the first time in February 1996 and on 8 February 1996, Mr Simpson wrote Mr Bankes (Ex A152) advising him of the sawlog production schedules from ANM’s operations.
Unfortunately, problems flared up again in March 1996. ANM refused to accept deliveries, complaining of metal contaminants in some loads. This caused Mr Mathys to write ANM on 26 March 1996 (Ex A178) in which he acknowledged that some of the complaints were valid; he also set out details of what steps he had put in place to avoid or minimise problems of contaminants. These included the installation of a new metal detector and the installation of magnets. The problem was temporarily resolved because ANM sent a facsimile transmission in reply on the same day (Ex R17) advising that Mr Mathys’ proposals “should improve the current unsatisfactory situation”.
MAY - JUNE 1996
Mr Mathys’ attempts to resolve the matter bore little fruit. The relationship between the two companies deteriorated. At a meeting on 2 May 1996, ANM stated that it would only take a maximum of eight loads of chip per day. In a strongly worded letter of complaint dated 8 May (Ex A191) Mr Bankes wrote Mr Humphreys stating that eight loads was significantly less that the Scottsdale mill’s production. He reminded Mr Humphreys that the original agreement was intended to cover the total production of chips at the mill. He stated:
“Auspine is currently stockpiling some 50 - 100 tonnes per day of ANM woodchip which is at ANM cost. The stockpile is now full and the sawmill will have to cease production. ...You also need to recognise that Auspine is accepting ANM sawlog deliveries at the expense of supply levels from other sources in honouring our agreement.”
Mr Bankes concluded his letter, saying:
A resolution of the matter is required within 48 hours.”
Yet, despite the seriousness of the situation Mr Humphreys gave no reply.
When pressed in cross-examination to explain why he did not respond to Mr Bankes’ complaints he said:
“Well, he knew my position.”(T892)
That was an answer which I found most unusual and difficult to accept; yet he repeated it later in his cross-examination (T913).
Despite the difficulties that existed, the parties were, somehow, albeit temporarily, maintaining commercial arrangements. For example, on 18 June 1996 Mr Simpson sent a facsimile transmission to Mr Jim Papamatheou in which he confirmed that, with effect from 1 May 1996, the chip purchase price was $45.03 per tonne and the sawlog selling price was $80.51 per tonne. That transmission was in answer to an earlier transmission from Mr Papamatheou of 7 June in which the same figures appear. Mr Papamatheou had been, until his resignation on 9 September 1996, Auspine’s Tasmanian manager.
THE SECOND VARIATION - JULY 1996
There was a second change in the commercial arrangements between the parties in late July 1996. Auspine described this change in its statement of claim as ‘the second variation” or, alternatively, “the first 1996 Agreement”. By whatever name it was called, it was agreed on the pleadings that such a change did occur. The change occurred in these circumstances.
ANM had refused to take deliveries again on 10 July 1996 because of contaminants and excessive fines. This decision was communicated to Mr Mathys of Auspine by facsimile and he replied to ANM on the same day listing the remedial action that he had taken. Mr Mathys’ attempts to placate ANM were either not successful or only temporarily successful for Mr Hingston wrote him on 15 July 1996 advising that the Boyer mill is “not willing to accept further deliveries apart from the loads on the way ...”.
On 17 July 1996 Mr Papamatheou reacted; he sent a facsimile transmission to Mr Humphreys (Ex R230) in which he said that Auspine:
“will not accept any further volumes of ANM sawlog, immediate as of tomorrow, Thursday 18th July, 1996.”
STAR OF PEACE
A notable omission from Mr Papamatheou’s letter was any reference to “Star of Peace” sawlog. “Star of Peace” is the name of a pine plantation in high country in the north east of Tasmania. ANM started delivering sawlog from this plantation to the Scottsdale mill sometime in early June.
It was the case for Auspine that all sawlog supplied by ANM had to comply with Forestry Tasmania specification. In addition, Auspine contended that the term “Forestry Tasmania Specification” has a special significance within the Australian forestry industry. It was claimed that the meaning so attributed was that the sawlog being delivered to a mill for processing would, in addition to the geometric description contained in that specification, be of a quality which would allow the mill to process a sufficient volume of timber products from that log that the mill in question would ordinarily process. In the circumstances, the applicant’s Scottsdale mill processed sawlog to produce timber products suitable for structural use in the Australian construction industry. Consequently, so it was claimed, the quality of the log which was to be supplied pursuant to the agreement had to be of such a quality as would allow Auspine to process a sufficient volume of such products. It was alleged that the vast majority of logs from Star of Peace were not suitable for this purpose - that they were “Merch” quality - and that Auspine was entitled to reject deliveries of such log.
Mr Foggo was, in June 1996, the Harvesting Manager of Auspine’s Tasmanian operations. He had a note of a telephone discussion that he had with Mr David Smyth of ANM on 17 June 1996 in which he warned Mr Smyth that Auspine were concerned about the quality of the Star of Peace sawlog. In par 46 of his affidavit sworn on 18 June 1997, he claims that he said to Mr Smyth:
“If the quality is proven to be no good then deliveries from Star of Peace will have to stop and the loads already in the yard rejected.”
Shortly after 20 June, Auspine’s Quality Control representative, Mr Phil Styles, reported to Mr Jim Papamatheou that the deliveries from the Star of Peace plantation “are of no benefit for sawlogs at all”. In his affidavit sworn on 27 June 1997, Mr Papamatheou deposed (par 14) that upon receiving Mr Styles’ report he informed Mr Simpson of ANM in a telephone conversation that Auspine would not be accepting sawlog from the Star of Peace plantation. But no mention of this fact was made in Mr Papamatheou’s letter of 17 July (Ex R230). He merely related the decision not to accept any sawlog to ANM’s attempts to “alter the guidelines of our agreement”. Auspine claimed that ANM well knew that its refusal to accept residue chip meant that Auspine was unable to process sawlog at its Scottsdale mill because it was unable to dispose of the residue chip that would be generated by such processing. But I have no doubt that Mr Papamatheou’s decision was also made in retaliation and was based onthe fact that Mr Hingston had advised that the Boyer mill would not take any further residue chip.
It was the case for ANM that the sawlog from the Star of Peace plantation did meet Forestry Tasmania specification - a proposition that Mr Papamatheou was not able to refute (T564-565) - and that Auspine’s refusal to take Star of Peace sawlog was a breach of the 1995 agreement (if it be assumed that such an agreement existed); it could not be said, so it was claimed by ANM, that there was an implied condition that the sawlog would be reasonably fit for use in producing structural grade timber. Auspine’s breach, so it was claimed, effectively meant that ANM could not sell its sawlog and that situation deprived ANM of substantially the whole benefit of the alleged 1995 agreement. The answer to this submission is short. The factual history of the trading relationship between these parties contradicts the conclusion that ANM seeks to draw. Rather than treating Auspine’s refusal to accept Star of Peace sawlog as a breach, ANM chose to accept its decision; thereafter the trading relationship resumed and continued but without sawlog from the Star of Peace plantation.
It is somewhat incongruous that ANM would seek to use Auspine’s refusal to accept Star of Peace sawlog as a ground for alleging breach of contract. ANM was just as ready to force a change on Auspine when commercial circumstances warranted it. For example, Mr Foggo in par 56 of his affidavit sworn 18 June 1997 deposed that on 12 September 1996 Mr Smyth of ANM said to him in a telephone conversation that ANM would shortly be ceasing its deliveries of all sawlog until the following January because it was moving its harvesting operations to a different plantation. From about December 1996, no further sawlog of any description was delivered by ANM to Auspine because the only plantation from which ANM was then producing sawlog was the Star of Peace. However, it is my finding that this was a situation that was accepted by both parties. Irrespective of their earlier contractual commitments (if any) ANM knew that Auspine did not regard sawlog from the Star of Peace plantation as suitable and ANM accepted that decision as a commercial fact of life. It made no complaint in any formal or legal sense. The same may be said of Auspine. It recognised that ANM was not able, for a period of some months, to generate sawlog from acceptable plantations; it made a commercial decision to accept that fact.
Auspine pursued the issue of the Star of Peace sawlog, describing it as “the third representation”. In par 13.3 of the statement of claim, it was alleged that ANM:
“ ... estimated that it would have 25,000 cubic metres of sawlog available for purchase by the applicant and that all of the sawlog to be made available would at least be of a quality that would enable the applicant to saw and/or process such sawlog for subsequent sale (“the purpose”) and that such sawlog would be fit for the purpose ...”
In pars 16A and 16B of the statement of claim there is a plea that the third representation was false in that ANM knew that:
“16A.1 at least one of its plantations known as Star of Peace was a high altitude or fast growing or poorly managed plantation which would have a tendency to produce brittle sawlog;
16A.2 a substantial proportion of the estimated volume of sawlog available to the applicant would be sawed from the Star of Peace plantation.
16B The Third Representation was a false representation that goods were of a particular standard, quality, value, grade, composition or had a particular history within the meaning of Section 53(a) of the Trade Practices Act 1974 (Cth) and within the meaning of Section 58 of the Fair Trading Act (SA), 1987 and/or Section 16 of the Fair Trading Act (Tas).”
This issue can also be disposed of summarily. When Auspine gave notice that it was rejecting all sawlog (including sawlog from the Star of Peace plantation) ANM accepted that rejection but the parties thereafter resumed trading in sawlog other than that which came from the Star of Peace plantation. The quality of the sawlog that was delivered by ANM following resumption has not been challenged. Thus the position may be summarised by saying that in the course of their trading relationship ANM delivered sawlog that Auspine found to be unacceptable. Because of Auspine’s complaint, ANM desisted from further deliveries of that sawlog. I fail to see how a commercial activity, so described, could be converted into representation. I therefore reject Auspine’s claim with respect to sawlog that came from the Star of Peace plantation.
THE SECOND VARIATION RESOLVED
Curiously, on 17 July 1996, the same day as Mr Papamatheou wrote stating that Auspine would not accept any more sawlogs, Mr Hingston submitted a facsimile message to Mr Mathys that ultimately lead to a solution to the impasse that then existed with respect to the supply of Auspine’s residue chips.
The combined efforts of the parties brought about another truce (or the second variation) and a resumption of supplies of woodchip and sawlog. The terms of their truce were set out in facsimile transmissions between Mr Simpson and Mr Papamatheou dated 25 and 26 July 1996 (Exs A237 and A238). In his transmission of 25 July, Mr Simpson had written:
“Auspine have confirmed that they currently cannot meet the ANM chip specifications.”
and
“Without re-visiting history, the current agreement is that pricing of our respective products was to be based on export parity, but specification was based on each party’s respective processing requirements.”
I find that this letter refutes ANM’s claims that Auspine was required to deliver to the Boyer mill specification. The expression “each party’s respective processing requirements” was a deliberate attempt to steer a middle course. Mr Simpson also wrote that his proposal “to progress the issue of chip supply to specification” was as follows:
“ · Auspine will accept the re-screening cost at Boyer of $5.00 per tonne.
· The increase in cartage cost of $1.78 incurred through substituting walking floor for conventional chip vans will be shared equally by ANM and Auspine.
· ANM will accept Auspine’s daily mill chip production (up to 16 loads per day). In the event that Auspine does not produce its planned production the balance can be made up of the stockpile providing the stockpile chip is of acceptable (to ANM) quality.
· In accordance with our agreement on cartage of June 7, the revised sawlog price for west coast sawlogs (from where the total production will be sourced) will increase to $99.47 less the agreed discount of $25.51, less a further $5.00 which equates to a sales price of $68.96.
· The agreement to be an interim measure to be reviewed on October 1 1996.”
Mr Papamatheou replied by saying:
“1. Auspine will accept the rescreening costs of $5.00 per tonne.
2. Auspine will share equally with ANM the cost of transport regarding rescreening of $1.78.
3. ANM to offset the invoiced sawlog price by $5.00.
4. ANM to accept Auspine daily chip production (up to 16 loads per day). In the event where Auspine does not meet planned production the balance to [be] made up from Auspine stockpile providing the stockpile chip is acceptable quality (no contamination)
5. ANM/Auspine working party to resolve chip specification and other aspects of supply agreement within the time frame of this proposal.
6. This working proposal to be an interim measure to be reviewed on October 1 1996 or prior to this date if ANM/Auspine working party has resolved issues regarding chip specification.”
Item 5 of this memorandum, which had not been addressed in the Mr Simpson’s transmission, is another item of evidence supporting the finding that the parties never agreed that the specification would be either Auspine’s Export specification or the Boyer mill specification. Despite the divergence in the language of the two transmissions that passed between Mr Simpson and Mr Papamatheou, Mr Simpson was content to report to Mr Humphreys on 30 July 1996 (Ex A241) that “Agreement has now been reached on the proposal for a resumption of Auspine’s chip supply to Boyer” and that “Auspine have confirmed their acceptance in writing”. I find that this arrangement constituted a further or second variation to the agreement that the parties had entered into in 1995.
AUGUST - SEPTEMBER 1996
Despite the events of June and July, an uneasy truce was brokered and deliveries of residue chip and sawlog resumed in August 1996. However, the sawlog did not include sawlog from the Star of Peace. But the truce was short lived.
On 1 August 1996, Mr Bankes wrote Mr Humphreys complaining about ANM’s “lack of performance” (Ex A243) and on 12 August Mr Humphreys replied (Ex A249) refuting those complaints and accusing Auspine of being responsible for the difficulties that were besetting the parties. In a vituperate internal memorandum dated 23 September 1996, (Ex A254) to Mr Horner, the newly appointed managing director of ANM, Mr Humphreys disclosed how he felt about Auspine and its senior officers and, in the course of so doing, went a long way towards explaining why these two large commercial houses were unable to find a business solution to their problems. He wrote:
“As you probably realise Auspine are the major source of sawmill chips in Tasmania (currently 50,000 tonnes rising to up to 90,000t in the future).
However Auspine have been a terrible supplier. Quality - a constant battle; price - to the last immediate cent; reliability - all over the place. Their culture is to take immediate rewards by any process immediately available - the future is tomorrow’s problem. As is so often the case with this sort of Company they have a lawyer in their office on a daily basis; their MD (Adrian de Bruin) is being enquired into about his dealings in the Company shares; their Board members are fighting openly in public; and their senior management is not only confused, but frightened.
The reason we persevere with this mob is that every time we cease using their chips our kraft usage pops up. Also it is a significant quantity of resource in its own right. In short, we do really need Auspine chips!”
Another aspect of the relationship between the parties at this time is to be found in an internal memorandum from Mr Mathys dated 25 September 1996 (Ex R256A). After listing the steps that he had implemented at the Scottsdale mill in an attempt “to achieve the specification ANM requires” he confessed that the mill’s quality was still “inconsistent”. He wrote:
“It is apparent that poor design and an underestimating of volume per hour that we are actually capable of producing is the main problem. Unless we install a screen that is capable of handling 200 M3 per hour we will always have this problem.
As we strive for efficiency our main aim of one shift for 1000 M3 input is out of our reach. As well as supplying the saleable commodity ANM requires.”
He concluded with a plea:
“Please advise on the direction you wish to pursue as I am sick of chasing my tail when the existing machinery is not suitable.”
ANM, once again, temporarily reduced its intake of chip in late September. Mr Hingston forwarded a facsimile transmission (Ex R258) to Mr Mathys at the Scottsdale mill on 27 September 1996 informing him that for the week ending 6 October the Boyer mill would only be able to accept six loads per day “as we have a paper machine shutdown during this week”. Mr Mathys did not happily accept this news; he responded (Ex A259) on 30 September saying that six loads was “totally unacceptable”, having earlier reminded Mr Hingston that “ANM have contracted to take the entire supply of softwood chips from the Scottsdale mill”. Mr Mathys further complained that Auspine already had thirty loads accumulated and that at an earlier meeting between the parties on 11 September “it was stated that the forecast close down in October would not affect our operation and that storage of ANM would accommodate normal deliveries”.
In an attempt to defuse the existing turbulent situation, ANM’s new managing director, Mr Russell Horner met with Mr Peter Ryan, Auspine’s Deputy Managing Director; according to the internal memorandum submitted by Mr Humphreys to Mr Horner (Ex A254), Mr Ryan “has been chosen to become the next Managing Director of Auspine”.
This meeting produced a conciliatory letter from Mr Ryan who wrote Mr Horner on 8 October 1996 (Ex R263) saying:
“The trading history between us has been somewhat chequered of late, yet the issues involved should be easily resolved. Auspine has taken immediate steps to insure that the chip supply to ANM will meet the specification corrected. At this time we are suffering from a reduction in the level of demand by ANM for our chip.
We trust that this situation, which is costly for us, can soon be rectified.
In the longer term, we would be extremely keen to participate as part of a working party, with the objective of moving towards long term arrangements, which will enable both parties to pursue logistic and technical benefits.”
It is significant that the letter falls short of identifying the relevant specification. If Auspine had nominated in the letter its Export specification as the appropriate specification, knowing, as I find it must have known, that the Export specification was not suitable for the Boyer mill, it would not have been conciliatory for Mr Ryan to have told Mr Horner that ANM had to accept chip to that specification. Hence, it is understandable that he would skirt around the issue with placatory (albeit vague) expressions about the chip supply meeting “the specification corrected”.
THE THIRD VARIATION - OCTOBER 1996
Auspine alleged in its statement of claim that in October 1996, there was “a third variation” to the 1995 agreement or, alternatively, that the first 1996 agreement was terminated by agreement and replaced with a further agreement, “the second 1996 agreement”. It was pleaded and agreed that the July 1996 interim agreement (earlier described as the second variation) came to an end, that ANM ceased re-screening residue chip at its Boyer mill and that thereafter, it would only accept eight loads of residue chip per day (or forty loads per week). Auspine then claimed that subject to these changes the 1995 agreement continued or, alternatively, resumed; this latter allegation was denied by ANM. In par 9P of its defence, ANM alleged that the second 1996 agreement operated, not as a variation, but as a self-contained contract that discharged and replaced whatever contract was then in force between the parties. It further claimed that the second 1996 agreement was terminable by it at any time on notice.
The quality of the chips that were being supplied by Auspine had improved. Mr Hingston had been able to write Mr Mathys on 29 October (Ex A267) advising that ANM would that day discontinue rescreening at Boyer. However, as has already been noted, he also added that the Boyer mill would only accept “eight loads of chips per day or forty per week as from 30 October 1996”. Mr Mathys explained how he reacted to this information:
“ANM controlled the cartage contractor, that if they said only eight loads per day, that was all the trucks that would come to Auspine to collect the chip. I had no choice in the matter.”
That piece of evidence was consistent with his evidence (T395) when he explained his reaction to the advice on 8 December 1995 that ANM would only take twelve loads per weekday. In my opinion, the evidence is sufficient to warrant a finding, and I so find, that an original term of the agreement between the parties was that ANM would take all of Auspine’s residue chip from the Scottsdale mill. However, notwithstanding this contractual commitment, ANM, from time to time, found itself unable to process all the residue chip that it was required to accept. On those occasions, it informed Auspine that there would be a reduced intake. Auspine was not happy about the situation, but as Mr Mathys said, Auspine had no choice. It accepted the situation. It continued to supply chip in accordance with the varied arrangements and, in so doing, it accepted those variations.
NOVEMBER 1996 - JANUARY 1997
Two matters of interest arose in November 1996. The first was a confidential report (Ex R270) that was prepared for ANM entitled:
“Future of Auspine Radiata Pine Sawmill Chips to the Boyer Mill.”
Significantly, it recommended that the Boyer mill should discontinue using Auspine’s radiata pine chips and thereby “realise the potential savings of $1m per annum”. In discussing “the option” of continuing trading with Auspine, the author of the report said:
“Historically, the business relationship between Auspine and ANM has been adversarial. Recent management changes at Auspine may lead to improved relations. However, strong contractual commitment of both supply and quality would be fundamental to any future business relationship between Auspine and ANM.”
Recent changes at Auspine had not, however, improved relations; that is the second matter of interest that arose in November when Mr Ryan of Auspine once again wrote Mr Horner of ANM. This letter, dated 13 November (Ex A271) was far from conciliatory. In it Mr Ryan claimed that the parties had formed a strategic alliance for the sale and purchase of woodchip and sawlog, that a satisfactory formula had been agreed upon (which involved sales taking place at export parity prices adjusted on a quarterly basis) and that Mr Bankes and Mr Humphreys were to finalise arrangements by an exchange of letters. The letter then continued:
“The key components of our agreement for 3 years was that A.N.M. Ltd. take all AUSPINE sawmill residue chip production estimated at 90,000 tonnes on an annualised basis and AUSPINE purchase available sawlog from A.N.M. Ltd. Specifications for both sawlog and residue chip were exchanged with chip as per export specification. The exchange of letters took place and the agreement was put into practice. No significant difficulties arose until early in 1996 in the workings of the agreement.
As a company we are very concerned that an agreement we entered into in good faith seems to be no longer an acceptable basis for A.N.M. Ltd. We are of the view that we have a legal agreement between our companies and it would be in both our interests to honour this agreement.
Therefore, I suggest that A.N.M. Ltd. resumes its purchases of all residue chip produced at AUSPINE as per the agreement. This will then provide the climate for us to discuss further the on-going strategic alliance arrangements entered into.”
Unlike his earlier letter of 8 October (Ex R263), Mr Ryan made direct reference to his company’s Export specifications. He also addressed the following important issues.
· The existence of an agreement;
· A term of three years;
· The requirement that ANM take all the residue chip from the Scottsdale mill;
· Auspine’s annual output would be about 90,000 tonnes per annum.
This estimate of 90,000 tonnes would convert into about fourteen loads per day. That calculation is based on the following entry in ANM’s confidential report (Ex R270):
“Currently, Auspine are having difficulty in selling their pine chip due to the soft domestic and export markets. Typically they could supply 15 truck loads per day, 5 days per week (97,500t/annum).”
ANM did not change its position. On 6 January 1997, Mr Bill Johnson, the General Manager of ANM’s Tasmanian operations submitted a report to Mr Horner. Relying on a perception that there was no long term contract in existence between ANM and Auspine he recommended that ANM should cease using Auspine’s woodchips for the following reasons:
“1. We are “over committed” for softwood and Auspine is the only non-contracted (other than our own plantations) supplier of wood to the mill. If we cut back in other supply we would incur additional costs estimated to be in the region of $750,000 p.a.
2. We save about $1.1 million p.a. (this does not include the $750,000 p.a. in 1. above) by stopping this supply of Auspine chips.
3. The quality of the Auspine chips is poor and results in upset operating conditions in TMP1 and variable pulp quality.
4. The relationship with Auspine has been very poor in the past and even though there are now different “players” involved, we have little faith that it will improve significantly in the future.”
Mr Johnson confirmed in his report that a meeting had been arranged for Thursday 9 January with representatives of Auspine and that Mr Peter Wallbank of Auspine had already been informed that ANM intended “giving notice of ceasing purchase of [Auspine’s] chips”. Mr Johnson said in his report that at the meeting ANM’s representatives would try to agree “reasonable notice” with Auspine’s representatives. The report concluded that it was possible that “there will be some P.R./Political flak over our decision” and that Auspine might “decide to attack us publicly” but it made no reference to legal commitments or legal obligations.
The meeting of 9 January 1997 duly took place. Mr Bankes of Auspine was one of the parties who attended. His notes of the events of the meeting (Ex A277), are, on the one hand, self serving, but, on the other hand, consistent with the stand that Auspine had been maintaining. He wrote that he had stated at the meeting that:
“ ... we have a contractual agreement by exchange of letters - it is a 3 year agreement commencing 1.8.95. Prior to reaching agreement Auspine had applied for an export licence and ANM object[ed] to DPI Canberra on basis that the woodchip was required by ANM for domestic processing. Also chip quality agreed as export specification not something different that the Boyer mill was demanding. At the meeting of 1995 at Tarpeena when both Auspine and ANM Managing Directors agreed to the contracted arrangement for woodchip and sawlog to be exchanged at international parity pricing the comment was made by Humphreys that if Boyer needs to re-screen the woodchip so be it.”
It is not without interest to note that Mr Bankes referred to the two managing directors coming to an agreement at “the meeting of 1995”. I have already pointed out that the two managing directors never met at either of the June meetings.
It is quite remarkable that ANM’s position should have changed so dramatically and so quickly. On 23 September Mr Humphreys, ANM’s General Manager of Forest Management, had written his new managing director, Mr Horner (Ex A254), urging him to meet Auspine’s Mr Peter Ryan because “we do really need Auspine’s chips”. Yet in less that two months there is a confidential report (Ex R270) recommending that ANM cease purchasing Auspine’s chips, a decision that was implemented and communicated to Auspine within another two months. In that four month period, events had overtaken Mr Humphreys’ assessment; ANM now found that it was “over committed” for softwood. Being of the opinion that Auspine was a “non-contracted ... supplier of wood” it moved quickly to terminate the relationship that then existed between the parties when Mr Horner wrote his letter of 22 January 1997 (Ex A279). It may well be that the quality of the residue chip that Auspine had been supplying fell below standard from time to time. So much is evident from the contents of the documentary evidence. But that was not the reason for ANM moving to discontinue its purchases. It did so for purely economical reasons. It no longer had a need for Auspine; it could get its woodchip cheaper elsewhere. It is significant that the letter of termination (Ex A279), made no reference to a failure by Auspine to comply with its trading commitments.
Auspine wrote ANM on 21 March 1997 (Ex A290) claiming that there was an enforceable contract in existence and threatening legal proceedings in the event that ANM did not give an undertaking to resume acceptance of deliveries by 1.00 pm, 24 March. The undertaking not being forthcoming, proceedings were instituted in this Court on 24 March. As part of those proceedings Auspine sought, in effect, a mandatory injunction requiring ANM to take its residue chip. An interlocutory argument on that particular issue was avoided when the parties came to a commercial arrangement that supplies of residue chip would resume and continue pending the outcome of this litigation. Based upon that arrangement, and Auspine having given the usual undertaking as to damages, the parties sought, by consent, and obtained from the Court on 27 March an order in the following terms:
“Until further order the respondent purchase and accept delivery on each week day that the Boyer mill is operational of 8 fully laden semi-trailer loads (approximately 200 tonnes) of residue chip produced by the applicant at its Scottsdale mill at the price of AUD $45.03 per tonne ex Scottsdale and of a quality no less than that of the residue chip supplied by the applicant to the period from 1 January 1997 to today.”
Further orders were made for the filing of pleadings and the filing by the parties of verified witness proofs limited to issues of liability.
THE CASE FOR AUSPINE
The primary case for the applicant is that the parties, in August 1995, entered into “the 1995 agreement” for the supply by Auspine to ANM of residue chip. In support of that allegation Auspine relies upon:
· ANM’s five-page internal memorandum dated 5 July 1995 (Ex A100) from Mr Simpson to Mr Humphreys setting out the details of ANM’s sawlog pricing structure, a copy of which was handed to representatives of Auspine at the meeting in Hobart on 6 July 1995
· the facsimile transmission from Mr Bankes to Mr Simpson dated 26 July 1995 (Ex A105) setting out, inter alia, calculations for the prices of woodchip and sawlog;
· the letter from Mr Humphreys to Mr Bankes dated 11 August 1995 (Ex A112) which, so it is claimed, represents ANM’s acknowledgment of the existence of a three year contract;
· the facsimile transmission from Mr Jim Panagopoulos to Mr Simpson dated 23 August 1995 (Ex A116) enclosing information on currency exchange rates, the chip export price for the quarter ending June 1995 and Auspine’s chip production schedule for the months of September, October, November and December 1995; and finally
· the letter from Mr Bankes of Auspine to Mr Simpson of ANM dated 13 December 1995 (Ex R145) purporting to confirm the terms of the parties agreement.
It is somewhat incongruous to plead, as was pleaded in the statement of claim, that an agreement was entered into in August 1995, that it was in writing and that part of the writing comprises a letter written four months later in December. I do not however consider that this incongruity represents a hurdle to Auspine or a prejudice to ANM. It might mean that if the agreement was made in August then Ex R145 is mere evidence of its existence, or, perhaps it means that the agreement comprised an offer made by ANM in August which was accepted by Auspine in December. But a more likely scenario might well be that which is pleaded in par 8.2A of the amended statement of claim: that is, that ANM having made an offer, it was accepted by Auspine’s conduct. That conduct commenced with the resumption of deliveries of residue chip on 14 August 1995 and continued thereafter (with interruptions) until the letter of intended termination from ANM in January 1997.
In par 8.2 of the amended statement of claim Auspine alleges in the further alternative that the agreement was partly oral and that to the extent to which it was oral, the parties reached agreement at the 9 June meeting on (inter alia) the following subjects:
· ANM would purchase from Auspine all the residue chip that would be produced by Auspine at its Scottsdale mill;
· that the residue chip to be supplied by Auspine would satisfy Auspine’ Export specification
The second of these allegations is not sound. As to the first, Auspine might well have bridled at ANM’s conduct in reducing the number of loads that it would accept, but it nevertheless accepted those changes when they were imposed on it. Perhaps Auspine could have, at the time, alleged that ANM’s conduct was a fundamental breach entitling Auspine to rescind: perhaps it could have sued for damages; but obviously, commercial prudence dictated that it should accept the decision. Its conduct, in continuing to supply residue chip is, without more, ample evidence of its acceptance of the change in circumstances.
ANM pleaded in its defence that the so-called 1995 agreement as pleaded and particularised by Auspine did not give rise to enforceable contractual obligations in the terms pleaded in that it was “incomplete or uncertain on essential aspects of its subject matter”. ANM also claimed that the 1995 agreement did not give rise to enforceable contractual obligations because:
“the parties intended to be legally bound only upon the exchange of letters dealing with all essential aspects of the subject matter of the 1995 agreement, which event did not take place.”
EXCHANGE OF LETTERS
These important issues of the need for an exchange of letters and uncertainty must now be discussed.
The decision of the High Court in Masters v Cameron (1954) 91 CLR 353 is an appropriate starting point in considering whether the alleged absence of “an exchange of letters” is fatal to Auspine’s claim. In that case, both parties signed a document which said, in part, that Mrs Cameron agreed to sell her farm to Mr and Mrs Masters “subject to the preparation of a formal contract of sale which shall be acceptable to [Mrs Cameron’s] solicitors ...”. The High Court, consisting of Dixon CJ McTiernan and Kitto JJ, held in a joint judgment that the document did not constitute a binding contract between the parties. But, as their Honours explained, references by parties, in the course of negotiations, to a subsequent or formal contract, could fall into one of three classes:
“Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.”(at 360)
Their Honours then went on to say that classes 1 and 2 of these categories constituted binding contracts whereas class 3 was indicative of cases “in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own” (at 361). Thus a Category 3 case is one in which the execution of a formal contract is a condition precedent to the existence of an enforceable contract. In such a case, the parties intend that there shall be no binding contract unless and until the formal contract comes into force. An example of a category 3 case is to be found in the earlier decision of the High Court in Summergreene v Parker (1950) 80 CLR 304. In that case, an estate agent, Parker, sued for his commission, alleging that he had effected the sale of the vendor’s business in accordance with her instructions. Parker had been instrumental in obtaining from two men a written offer to purchase Mrs Summergreene’s business. The offer was made by them as “the trustees on behalf of a company to be formed”. Clause 6 of the offer was as follows:
”The usual agreement for sale and purchase to be entered into by you and the company containing the usual terms of sale and these terms in a form to be satisfactory to you and to the company.”
Mrs Summergreene accepted the offer but later refused to settle. It was held that correspondence passing between the parties, including the written offer, was insufficient to constitute a contract for the sale and purchase of the business. The Court also added that in any event, cl 6 was so uncertain in its terms as to prevent the arrangement amounting to a binding contract.
Another example of a category 3 case is Allen v Carbone (1975) 132 CLR 528. In that case, an estate agent made an offer to the owner of a certain property to purchase the property on behalf of a third party. The owner accepted the offer and signed a document by which he authorised the agent to sell the property to the third party for the agreed price; the owner also agreed to enter into a contract for sale “in form approved by the Real Estate Institute of New South Wales”. A deposit was paid and the agent then told the owner’s solicitor that the property had been sold and asked for a contract for sale to be forwarded to the purchaser’s solicitor. He also wrote to the owner and informed him that the property had been sold and that the details of the sale had been forwarded to the owner’s solicitor. A formal contract was never executed. The High Court held that the parties’ agreement constituted no more than a preliminary agreement which preceded the giving of instructions to solicitors and the signing and exchange of contracts in the usual way. The parties contemplated that they would not be bound until a formal contract was signed by them and exchanged by their solicitors and that therefore a binding contract had not come into existence. Evidence that the parties intend to consult a lawyer in order to ensure the legal efficacy of their proposed agreement can suggest an intention to be bound to the agreement at some point thereafter, see: Barrier Wharfs Ltd v W Scott Fell & Co. Ltd (1908) 5 CLR 647 at 663 per Isaacs J.
By contrast, an obligation to document the terms of an agreement may be considered “a mere expression of the desire of the parties as to the manner in which a transaction already agreed to will in fact go through…”: see Von Hatzfeldt-Wildenburg v Alexander [1912] 1 Ch 284 at 288-289 and Sinclar Scott Co Ltd. v Naughton (1929) 43 CLR 310 at 317 per Knox CJ, Rich and Dixon JJ. In those circumstances, the parties “arrangement” would fall into and become a category 1 case. Branca v Cobarro [1947] KB 854 is an example of a case falling within the first category. In that case, the Court of Appeal held that a binding contract existed for the sale of a mushroom farm where the memorandum of agreed terms stated, inter alia “This is a provisional agreement until a fully legalized agreement, drawn up by a solicitor and embodying all the conditions herewith stated, is signed”. Lord Greene MR (with whom Tucker and Asquith LJJ agreed) held that:
“The ordinary meaning of the word ‘provisional’ I should have thought was something which is going to operate until something else happens. If it was intended to show that the parties regarded themselves as entering into an agreement which was to last only until something else took its place or superseded it, the word “provisional” would be the proper and apt word to describe that intention.” (at 858)
This interpretation of the agreement shows that the formal (subsequent) document is regarded as a contract in its own right, discharging the initial, preliminary contract but that the last mentioned (preliminary) contract is to remain in full force and effect until that discharge.
Carter and Harland suggest that the use of the phrases “subject to contract” or “subject to the preparation of a formal contract” create a strong presumption that the agreement reached between the parties is not binding (supra at 86), see also Masters v Cameron at 362, Tiverton Estates Ltd v Wearwell [1975] Ch 146 at 169; A-G for Hong Kong v Humphreys Estates Ltd [1987] AC 114 at 121. On the other hand, Professor Lucke explains that the very existence of intermediate documents, setting out the parties’ “understanding” as to their contractual arrangements (but which envisage the signing of a more formal contract), indicates that:
“the parties have reached some finality in their negotiations about the terms, even though they may still want to take the precaution of getting a legal expert to scrutinize and, if necessary, improve the agreement” (Arrangements Preliminary to Formal Contracts 1967 Adel LR 46)
Furthermore, as Lord Blackburn observed in Rossiter v Miller (1878) 3 App. Cas 1124:
“…the mere fact that the parties have expressly stipulated that there shall afterwards be a formal agreement prepared, embodying the terms, which shall be signed by the parties, does not, by itself, show that they continue merely in negotiation.”(at 1151)
Where the parties to an arrangement contemplate the subsequent execution of a formal contract or contemplate further documentation such as an exchange of letters, but do not qualify their arrangement as being “subject to contract” or as being conditional upon the exchange of letters, the question to be determined by the court is whether the parties intended to be immediately bound: Winn v Bull (1877) 7 Ch D 29 at 32; Niesmann v Collingridge (1921) 29 CLR 177; Powell v Jones [1968] SASR 394; Commercial Bank of Australia v GH Dean & Co Pty Ltd [1983] 2 Qd R 204; Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646; Marek v Australasian Conference Association Pty Ltd [1994] 2 Qd R 521. See also Lucke (supra) and Carter and Harland (supra at 86).
While evidence of the conduct of the parties to a contractual dispute may not generally be referred to in construing the terms of a previously concluded contract: Inglis v John Buttery & Co (1878) 3 App. Cas 552 at 572, Maynard v Goode (1926) 37 CLR 529 at 538: such conduct may be considered when determining whether previous dealings between the parties have given rise to a binding contract. In particular, it may be relevant to a determination of whether the parties intended to create a binding contract. In Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, the Court of Appeal considered the circumstances in which a court could have regard to extrinsic evidence of surrounding circumstances for the purpose of determining objectively whether there was an intention that there should be a concluded contract. Mahoney JA and McHugh JA held (Hope JA taking a different view) that it was open to the Court to hold that the intention to create a legally binding contract may be proved by what the parties said and did. McHugh JA said:
“I think that it still remains of social and commercial importance to enforce the actual intentions of the parties to make a contract as manifested by their conduct, in the absence of fraud, mistake, duress, unequal bargaining power or a similar invalidating factor.”(at 338)
Thus it was held that the statements and actions of the parties as well as the contents of the relevant document can be taken into account in determining whether there was an intention to create a legally enforceable agreement. In any event, as McHugh JA pointed out, it is established law that the surrounding circumstances can be taken into account to ascertain the parties’ intention as it appears in the document: Allen v Carbone (supra at 531). Similarly, Professor Lucke in his article states that where the preliminary agreement and the circumstances surrounding it provide insufficient guidance as to the existence of a binding contract, the parties’ subsequent conduct may show whether they meant to be bound:
“Where parties commence performance under a preliminary arrangement prior to the signing of the formal contract, the only rational inference must often be that they intended the arrangement itself to be binding, particularly where the acts of performance are onerous and their effects irreversible…As the cases show, however, the mere fact that formal document is contemplated is rarely relied upon as a decisive consideration.” (at 65-66)
In determining whether the terms of an agreement have been accepted by the parties as being binding upon them despite the absence of documentation, the Court must embark on an objective analysis of the facts and, in particular, of the parties intentions: see Johnson v Taylor (1983) 151 CLR 422 at 429; cf Air Great Lakes Pty Ltd v K.S. Easter (Holdings) Pty Ltd (supra) at 334-337 per McHugh J; W. Howarth, The Meaning of Objectivity in Contract (1984) 100 LQR 265.
This proposition is illustrated by the NSW Court of Appeal decision of Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523. That case is useful for two purposes. First, it demonstrates the factors to be taken into account by a court when considering whether the terms of an offer have been accepted as a consequence of the conduct of a party. Secondly, it demonstrates the manner in which the court examines the conduct of the parties to a contractual dispute to determine whether there existed an intention to create a legally enforceable contract.
The question in that case was whether, notwithstanding the failure or refusal of the appellant company to execute the printed contract presented to it by the respondent, that contract bound that appellant. The facts were as follows. Empirnall was a property developer. Its director and major shareholder was a Mr Eric Jury. Empirnall purchased certain property in New South Wales in 1983 which it planned to develop. Through its agent, it engaged the services of Machon Paull, a firm of architects and project managers. They prepared a report on the development; they also prepared plans, drawings and the necessary local government applications. Conditional approval to the development was given. Machon Paull agreed to undertake the preparation of the building contract and a set fee was agreed. They were also invited to commence demolition work on the property.
It was at this point that Machon Paull began to express concern about the growing expense for which they had not been paid. Upon their inquiries as to the signing of the contract, Machon Paull were informed by the agent of Empirnall that “Eric [Jury] does not sign contracts”. Nevertheless, Machon Paull supplied Empirnall with the relevant contract, seeking its execution and return. This did not happen. Machon Paull subsequently wrote to Empirnall stating that it was “proceeding on the understanding that the conditions of the contract are accepted by you and works are being conducted in accordance with those terms”.
At trial, Empirnall had denied that it was liable under the printed contract as it had never executed it. Empirnall argued that if any contract existed between the parties, it was a contract other than the printed contract. It had also argued that only if its acceptance of the printed contract could be spelt out of its conduct could it be held to its terms and finally that “silence and inactivity have never been taken by the common law as tantamount to assent” (at 527).
In the Court of Appeal Kirby P (with whom Samuels JA agreed) began with the basic principle that an offeror may not impose a contractual obligation upon an offeree by stating that if the latter does not expressly reject the offer as made, it will be taken to have accepted it: see Felthouse v Bindley (1862) 11 CB (NS) 869; Fairline Shipping Corporation v Adamson [1975] QB 180 at 189 and Karlin v Avis 457 F 2d 57 (1972). This principle, his Honour explained, is derived from “the disinclination of the common law to impose legal liability upon individuals for omissions [and as a] consequence of the common law’s protective attitude towards liberty of conduct and its resistance to the unilateral imposition of obligations. ” (at 528).
But his Honour also pointed out (at 528) that in particular circumstances, the general rule may work an apparent injustice and that this has caused the courts in some circumstances to infer an acceptance to proposed contractual arrangements, notwithstanding the absence of specific consent. Kirby P then said:
“The other way in which the common law has provided relief from an apparently unfair operation of the general principle that silence is not regarded as acceptance is by an implied acceptance, derived from an objective consideration of all the relevant facts and circumstances.”(at 528)
In such circumstances, Kirby P concluded that it was by virtue of the existence of some previous dealings between the parties, or something in the history of the transaction between the parties, that gives rise to “an inevitable inference from the conduct” of the disputing party, and from its “doing and saying nothing” for a considerable time, that it “accepted the [contract] as valid” (at 528); see also Rust v Abbey Life Assurance Co Ltd [1979] 2 Lloyd’s Rep 334 at 340. From the judgment of Kirby P there can also be derived a number of factors that are to be taken into account by a Court when considering whether the existence of a contract can be inferred. The general proposition that silence is not normally regarded as consent giving rise to a prima facie conclusion that the contractual arrangements of the parties are to be found elsewhere (and not in a document that has not affirmatively been accepted by one of the parties) is tempered by the following considerations:
· whether one party has indicated an intention to sign the printed contract (in Empirnall his Honour stated that Mr Jury’s emphatic refusal to agree to sign the written agreement “makes it more difficult to imply assent to the written agreement” (at 529));
· whether the printed agreement represented a complete contract between the parties. As to this, Kirby P stated that, unless essential terms have been omitted from the contract, omissions will not invalidate the effective operation of the printed agreement: Brogden v Metropolitan Railway Co (1877) 2 App. Cas 666 at 674;
· whether there exists clear evidence of affirmative agreement by the parties to be bound by the terms of the agreement, which evidence is indicated by the existence of prior negotiations between the parties;
· the identity of the parties and the nature of their relationship as a commercial one may more readily give rise to the inference that they had previously agreed to be bound by a printed contract than would be the case if the dealings involved private individuals having no similar commercial attributes. In Empirnall Kirby P considered the relationship between a property developer and a firm of architects was an indicia that the parties had previously agreed to the written contract;
· the existence of progress payments made over the whole course of dealings between the parties is compatible with the acceptance by a party of the printed contract, particularly where progress payments are envisaged by the printed contract;
The test adopted by Kirby P was whether an objective bystander, examining the facts of the case, would conclude from the whole course of dealings between the parties that one party, by its conduct, had accepted the printed agreement tendered to it by the other. Upon examining all of the facts in their context, Kirby P held that there had been an agreement between Empirnall and Machon Paull by virtue of the former’s implied acceptance of the printed contract, notwithstanding its earlier protests that Mr Jury did not sign written contracts.
McHugh JA began with a similar premise that silent acceptance of an offer is generally insufficient to create any contract: Brogden v Metropolitan Railway (supra) and Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 at 1432. However, his Honour noted that the silence of an offeree in conjunction with the other circumstance of the case may indicate that the offer has been accepted: Rust v Abbey Life Assurance Co Ltd (supra). His Honour went on to say at 534-535:
“The offeree may be under a duty to communicate his rejection of an offer. If he fails to do so, his silence will generally be regarded as an acceptance of the offer sufficient to form a contract. Many cases decided in the United States jurisdictions have held that the custom of the trade, the course of dealing, or the previous relationship between the parties imposed a duty on the offeree to reject the offer or to be bound: CMI Clothesmaker Inc v ASK Knits Inc 380 NYS 2d 447 (1975); Brooks Towers Corporation v Hunkin- Conkey Construction Co 454 F 2d 1203 (1972); Alliance Manufacturing Co Inc v Foti 146 So 2d 464 (1962). But more often than not the offeree will be bound because knowing of the terms of the offer and the offeror’s intention to enter into a contract, he has exercised a choice and taken the benefit of the offer…where an offeree with a reasonable opportunity to reject the offer of goods or services takes the benefit of them under circumstances which indicate that they were to be paid for in accordance with the offer, it is open to the tribunal of fact to hold that the offer was accepted according to its terms.”
McHugh JA adopted a similar test to that of Kirby P, stating at 535:
“The ultimate issue is whether a reasonable bystander would regard the conduct of the offeree, including his silence, as signaling to the offeror that his offer has been accepted.”
On the basis of an objective consideration of the fact that Empirnall as the offeree took the benefit of the work of Machon Paull with knowledge of the terms on which it was offered, McHugh JA held “an objective bystander would conclude that Empirnall had accepted the offer on those terms and conditions.”
In the well known case of Brogden v Metropolitan Railway Co (supra) the House of Lords had cause to consider factual circumstances similar to those in the present case. Brogden had for several years supplied the plaintiff company with coal without a formal agreement. At length the parties decided to regularise their relations. The plaintiff’s agent forwarded a draft form of agreement to Brogden, who, having completed some blank spaces and having inserted the name of an arbitrator in a space which had been left blank for that purpose, signed it and returned it, marked “approved”. The plaintiff’s agent put it on his desk and nothing further was done to complete its execution. Both parties thereafter acted on the strength of its terms, supplying and paying for coal in accordance with its terms until a dispute arose between them. At that stage Brogden denied any binding contract existed. The question before the Court was when, if ever, mutual assent to the terms of the contract existed. Assuming the delivery of the document by Brogden to the plaintiff was a final and definite offer to supply coal on the terms contained in the offer, the question before the Court was when was it accepted? The subsequent conduct of the parties could only be explained on the assumption that both did, in fact, approve of the terms of the draft. The House of Lords held that a contract came into existence either when the plaintiff ordered its first load of coal from Brogden upon the terms as contained in the draft, or at least when Brogden supplied it. Lord Hatherley stated:
“My Lords, Mr Herschell…put the case on a very proper foundation, when he says that he will not contend that this agreement is not to be held to be a binding and firm agreement between the parties, if it should be found that, although there has been no formal recognition of the agreement in terms by the one side, yet the course of dealing and conduct of the party to whom the agreement was propounded has been such as legitimately to lead to the inference that those with whom they dealt were made aware by that course of dealing that the contract which they had so propounded had been in fact accepted by the persons who so dealt with them.” (at 682)
Lord Blackburn quoted from the judgment of Lord Chief Justice Cockburn in the Court of Appeal, agreeing:
“... that if a draft having been prepared and agreed upon as the basis of a deed or contract to be executed between two parties, the parties, without waiting for the execution of the more formal instrument, proceed to act upon the draft, and treat it as binding upon them, both parties will be bound by it. But it must be clear that the parties have both waived the execution of the formal instrument and have agreed expressly, or as shewn by their conduct, to act on the informal one.”(at 693)
The Court held that all subsequent arrangements between the parties with respect to the supply and purchase of coal were referable to the terms of the agreement that had been endorsed “approved” and returned by Brogden to the plaintiff’s agent.
In Vroon BV v Foster’s Brewing Group (supra), the plaintiff (“Vroon”) and the defendant (“Fosters”) agreed to incorporate a company which would acquire a ship that would be used as a live sheep carrier between Australia and the Middle East. The ship was to be managed by Vroon and chartered by a subsidiary of Fosters. Vroon and Fosters had been involved in negotiations with respect to the proposed joint venture since early 1988 and on 15 September 1988, Vroon wrote Fosters stating that “we now have full agreement on the basic issues”. A ship was found in November and agreements to buy the ship were entered into during December 1988. A subsidiary of Fosters entered into a charterparty on 23 January 1989 for a four year charter period. Draft heads of agreement for a joint venture were produced in February 1989, but these were not proceeded with. Negotiations continued until September 1989 when a shareholders’ agreement and other associated agreements were executed by various related corporations. However, there was a downturn in the live sheep export trade and, moreover, hostilities had broken out in the Gulf Region in 1991. Fosters’ subsidiary terminated the charter-party pursuant to a war clause, but Vroon alleged that there was an overriding joint venture agreement between it and Fosters which obliged Fosters to provide long term employment for the ship and pay the appropriate hire for the balance of the four years. It alleged this agreement was made in September 1988 or alternatively December 1988. It further alleged that Fosters was subject to an implied obligation under the joint venture agreement to act in good faith. Fosters denied the existence of any joint venture agreement, alleging that the only agreements between the parties were those made on 23 January and in September 1989, that is, the charter-party and the shareholders agreement.
Ormiston J held there was an implied agreement “which might be characterised as a joint venture” and that it was reached either at the end of December 1988 or at the middle of January 1989. In support of that conclusion he pointed to several factors. For example; the subject matter of the joint venture (ie the ship) was known along with its price and the costs of its conversion. Contracts for purchase and conversion of the ship had been entered into and Fosters had paid its half share of the deposit. Further, Fosters had approved two contracts under which it and Vroon were obliged to make further payments.
As early as August 1988, Fosters had sent a letter to Vroon setting out the basis of their negotiations and further stating there should be “acceptable heads of agreement, partnership agreement associated documentation” (at 75). His Honour found (at 41) that the representatives of Fosters were “insistent that every aspect of the agreement should be fully and adequately documented”. But despite this, it was Vroon’s case that there was an overall joint venture agreement which relationship was to be inferred from the relationship between the parties but which never took the form of a signed agreement.
In discussing whether a contract may be inferred from the acts, conduct and language of parties, Ormiston J (at 83) referred to the decision of McHugh JA in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 (C.A(N.S.W.)) where his Honour had said:
“The question in this class of case is whether the conduct of the parties viewed in the light of the surrounding circumstances shows a tacit understanding or agreement. The conduct of the parties, however, must be capable of proving all the essential elements of an express contract”(at 11,117-11,118)
Ormiston J in Vroon said:
“The conclusion must depend on whether the parties’ acts can be seen to be inconsistent with an insistence on the signature of documents as a pre-condition to contractual liability.”(at 88)
His Honour held that having gone so far in the implementation of the joint venture, this was a case where the law must imply agreement to perform that which was necessary to bring about the desired end, especially when the obligations already incurred were as substantial as they were in that case. More importantly, his Honour held that the parties’ acts from November 1988 to January 1989 were inconsistent with Foster’s earlier insistence on the signature of documents as a precondition to contractual liability. They were so far committed to the acquisition and use of the vessel that the court ought to imply that they had reached agreement. However, unlike the present case, the parties in Vroon BV v Foster’s Brewing signed additional documents in September 1989. The nature of those documents was such that his Honour came to the conclusion that there was no general joint venture agreement on foot after the execution of those agreements. His Honour held that the September documents, coupled with the documents that had earlier been signed in the preceding January, were intended to take the place of the implied agreement. In other words, the totality of the executed agreements amounted to almost every conceivable aspect of the dealings between the parties. The case remains of interest and relevance however, for his Honour’s view on the situation as it existed prior to September 1989.
As I have already said, the Court must embark on an objective analysis of the facts and, in particular, of the parties’ intentions. What then is the position in this case? Can it be said, as has been submitted on behalf of ANM that the parties did not intend their arrangements to be binding unless and until there had been an exchange of letters? Clearly the answer to this question was, initially: Yes.
· There is a reference to “Heads of Agreement” in Mr Humphreys’s letter of 13 October 1993 (Ex A15);
· Auspine’s memorandum of understanding (Ex A31), compiled in early 1995 contemplated the parties completing and executing two agreements - the “log supply” and the “woodchip” agreements;
· Mr Humphreys wrote Mr Ogilvie an internal memorandum on 31 January 1995 (Ex A42) commenting that the agreement was to commence on the “Signing of Heads of Agreement”;
· Mr Panagopoulos of Auspine wrote Mr Simpson on 3 March 1995 (Ex A48) in reply to Mr Simpson’s letter of 28 February 1995 (Ex A47) in which he referred to an “exchange of letters between our respective Managers”;
· Mr Ogilvie’s letter to Mr de Bruin of 7 March 1995 referred to the parties signing “Heads of Agreement”;
· Mr Bankes, in his letter of 26 July 1995 (Ex A105), wrote “Letter of Agreement to be used in preference to formal legal agreement” and Mr Humphreys’ replied on 11 August 1995 (Ex A112) saying that “our arrangements will be documented by an exchange of letters”.
However, it is just as clear that the parties attached reducing importance to this issue as time went by.
· Trading between the parties resumed on 14 August 1995 notwithstanding that there had been no exchange of letters;
· Mr Bankes endorsed a note to Mr Panagopoulos (on Mr Simpson’s letter of 11 September 1995 Ex A128) asking him to “put together letter of agreement”;
· The commercial relationship between the parties and the manner in which that relationship evolved in the period from April 1995 when Auspine ceased deliveries until August 1995 when it resumed deliveries infers that the parties, at the most, only intended the exchange of letters to reflect the terms to which they had already committed themselves.
The conclusion that I have reached, based in part on:
· the history of the parties’ trading relationship
· the many references in the correspondence to a fixed term agreement from both parties
· Auspine severing its business dealings with North Forest Products and Mitsubishi and
· the resumption of deliveries of woodchip on 14 August 1995
indicates that the arrangements that were made between Auspine and ANM fall into the first category of the cases described in Masters v Cameron. Gradually, over a period of time the parties “reached finality in arranging all the terms of their bargain”; they intended to be bound immediately to the performance of those terms even though some of them were not finalised before deliveries recommenced. They expected to have the terms of their agreement set out in an exchange of letters and Mr Humphreys’ letter of 11 August 1995 was one of the first steps in that exercise but, despite earlier indications to the contrary, it was not their intention to defer the making of a concluded bargain pending the intended exchange of letters. If either of them was silent with respect to any particular term there was, nevertheless, as a consequence of the conduct of the parties, “an implied acceptance, derived from an objective consideration of all the relevant facts and circumstances”: Empirnall Holdings v Machon Paull (supra at 528).
Having concluded that there was on foot in January 1997 an enforceable agreement the next question to determine is the term or period of that agreement.
In my opinion it was always the intention of the parties that they would commit themselves to a fixed term agreement. This conclusion is supported by the following evidence:
· The parties had earlier had a fixed term contract and ANM was seeking a renewal of that contract: see ANM’s letters of 15 October 1991 (Ex A3) and 14 July 1992 (Ex A7);
· Mr Humphreys wrote on 13 October 1993 (Ex A15) offering a term contract determinable on one year’s notice and commencing on 1 November 1993;
· Mr Bankes wrote on 14 March 1994 (Ex A23) advising that Auspine was interested in developing a long term arrangement with respect to the purchase of sawlog;
· Mr Humphreys wrote on 12 December 1994 (Ex A36) offering to take all Auspine’s woodchip for a “five year rolling term” and Mr Bankes replied on 13 December (Ex A37) suggesting a three year rolling term;
· The draft agreement (Ex A41) prepared by ANM’s solicitors in late 1994 - early 1995 contained a provision that the initial term of the contract would be five years;
· Mr Humphreys wrote Mr Ogilvie an internal memorandum on 31 January 1995 (Ex A42) referring to a five year rolling term;
· Mr Bankes wrote on 2 February (Ex A44) and 15 February 1995 (Ex A45) advising that Auspine sought $38 per tonne for its woodchip. Initially he said that Auspine wanted a three rolling term in lieu of the suggested five year rolling term but in the later letter he reverted back to five years;
· Mr Simpson’s letter of 28 February 1995 (Ex A47) which discussed the supply of woodchip and sawlog for “the next five years”;
· ANM’s conduct in writing the Commonwealth Minister and pressing for a resumption of discussions when Auspine terminated its deliveries of woodchip and sought entry into the export market;
· Mr Bankes’ letter of 26 July 1995 (Ex A105) in which he referred to a term of three years and Mr Humphreys’ letter of 11 August 1995 (Ex A112) agreeing to that term;
· ANM’s offer on 8 January 1996 to pay during “the term of the chip agreement” 50 per cent of the cost of constructing a storage pad, which offer was repeated in Mr Simpson’s facsimile transmission on 14 February 1996 (Ex A159).
I find that this last mentioned transmission, in particular, corroborates other evidence and supports Auspine’s claim that there was in place, and binding on the parties, an agreement for a fixed period of time. That agreement was for a term of three years as from 1 August 1995 and, originally, it was in relation to ANM taking delivery of all Auspine’s residue chip from its Scottsdale mill. If, however, I am wrong and the correct position is that the parties did not intend a fixed term agreement (of three years) to come into force unless and until there had been an exchange of letters, then it is my opinion that there was such an exchange and that it was constituted by Mr Humphreys’ letter of 11 August 1995 (Ex A112) and Mr Bankes’ letter of 13 December 1995 (Ex R145).
AUSPINE’S FURTHER CLAIMS
In pars 13 and 14 of its statement of claim Auspine has alleged that ANM engaged in misleading and deceptive conduct in breach of ss 51A and 52 of the Trade Practices Act 1974 (Cth) (“the TPA”) and the comparable South Australian and Tasmanian legislation. The impugned conduct is based on allegations that at the 9 June meeting Messrs Ogilvie and Humphreys represented to Auspine that ANM would take all Auspine’s residue chip that was generated at the Scottsdale mill. I am satisfied that such a representation was originally made; specific reference to it appears in Mr Humphreys’ earlier memorandum to Mr Ogilvie dated 31 January 1995 (Ex A42) and Mr Ogilvie confirmed it in his evidence. But, as I have already said, Auspine chose to accept the changes in the loads. It clearly waived compliance with that representation on the three occasions in December 1995, July 1996 and October 1996 when it accepted variations to the number of loads that it could deliver to the Boyer mill.
Auspine has alleged in par 21 of the statement of claim that ANM “is estopped from denying the existence of the 1995 agreement” (or indeed any of the variations or alternative agreements) or is estopped from “resiling from performing its obligations thereunder by reason that the respondent has since August 1995 by its conduct led the applicant to believe that such an agreement was in place and the applicant has acted to its detriment”. In particularising this allegation Auspine alleged that:
“ ... on the understanding that there was and remains an agreement in force between the parties for the supply of residue chip until 31 July 1998, the applicant has not secured and has not sought to secure contracts for the supply of all of the residue chip produced at its Scottsdale Mill to alternative purchasers.”
I do not consider that Auspine can establish its case in estoppel even though soon after the meeting of 9 June 1995 Mr Plummer ceased pursuing both the application for an export licence and the prospect of a long term contract with Mitsubishi. Whilst it is true that it broke off its negotiations with Mitsubishi and ceased trading with North Forest Products, both these events occurred before 14 August 1995 - that being the date when Auspine resumed deliveries of residue chip to ANM’s Boyer mill. Auspine broke of its relationships with Mitsubishi and North Forest Products in anticipation that it would conclude a satisfactory trading relationship with ANM, not because it had concluded such a relationship. It could not be said of ANM that it had, at any time prior to 14 August engaged in some sort of conduct representing that it had entered into a binding legal contract. Any such representation would have had to have been clear and unequivocal: Legione v Hateley (1983) 152 CLR 406 at 435-437.
The next plea that was raised by Auspine appears in par 21B of the statement of claim. It was there alleged that ANM’s termination of the contract was “unreasonable or represented a failure on the part of the respondent to act, in respect of the .... termination of such contractual arrangements, in good faith towards the applicant”. Auspine made that plea based on the allegation that ANM terminated the contract, not for reason of breach on Auspine’s part, but rather so that it could source chip that it required for the Boyer mill more economically from alternative suppliers. ANM denied this allegation. In view of the findings that I have made and which favour Auspine, it will not be necessary to consider this submission in any detail even though I am of the opinion that the allegation made by Auspine reflects the truth of the matter.
THE CASE FOR ANM - UNCERTAINTY
ANM’s primary submission was that the so-called 1995 agreement never came into existence; alternatively, if it did come into existence, it was cancelled or terminated by mutual consent when the parties agreed - either in July 1996 or October 1996 - for the introduction of new supply arrangements. I do not accept that alternative proposition. The admitted changes were in my opinion variations to the basic contract that then existed. I do not regard the changes in the daily loads, nor any other alteration, as being of such a dramatic nature as to warrant a finding that an existing agreement was cancelled and that another agreement between the same parties (dealing with the same twin subjects of residue chip and sawlog) came into existence for a limited duration of time.
As I have said, ANM has submitted that the short answer to the alleged existence of the 1995 agreement is that an exchange of letters between the parties was a precondition to any such agreement coming into existence: there being no exchange of letters, there could be no agreement. In support of its proposition that no agreement ever came into existence ANM further submitted that Mr Humphreys letter of 11 August 1995 was uncertain in that:
· it did not specify a complete mechanism for determining the price of chip and log (in the absence of agreement between the parties); and
· it did not stipulate the required chip specification. As to the failure to stipulate the specification, I have already stated my finding on that subject.
The alleged absence of a complete mechanism has not been shown on the evidence to have been an issue that arose during the parties trading history: on the contrary, the evidence points to the parties successfully implementing reviews of prices on three occasions. Adjustments to price calculations were made by consent for the quarters up to and including the quarter that commenced on 1 May 1996. Mr Bankes agreed that he had no knowledge of an exercise being carried out for the delivered log and chip prices for the quarter which began on 1 August 1996 (T255): nor was it done for the quarter which began on 1 November 1996. But it is a fact that the parties were able, in June 1996, to negotiate prices for the quarter beginning on 1 May 1996. The agreed price for chip was $45.03 per tonne and Auspine sought and obtained a new cartage rate for sawlog to reflect the different areas from which sawlog was then being serviced. As a result, the delivered sawlog price was agreed at $80.51 per tonne: see transmission dated 7 June 1996 from Mr Papamatheou to Mr Simpson (Ex A207) and Mr Simpson’s reply to Mr Papamatheou dated 18 June 1996 (Ex A212).
On 1 November 1996, ANM was paying $45.03 per tonne for Auspine’s chip, that being the same figure as had resulted from the calculation and agreement which had been made for the three months starting 1 May 1996. As counsel for ANM acknowledged in his closing submissions, that figure remained current when the injunction was granted.
It would seem to me therefore that it was common ground that representatives of the parties met and agreed on their review of chip and sawlog prices for the quarters up to and including the quarter commencing on 1 May 1996. Thereafter the position appears to have remained unaltered, but not because of any default or refusal by one or other of the parties to conduct a price review. Neither party has led evidence pointing the finger of default against the other party on this issue. I am unable to say why no quarterly reviews took place thereafter. But it serves no purpose to say that the agreement might have then collapsed if the parties were unable to agree on price reviews. The fact was, that on 22 January 1997 when ANM wrote saying that it had decided to discontinue its purchases of residue chip, there had been no disagreement on prices. Both parties remained content with the prices that had been agreed in respect of the quarter that commenced on 1 May 1996. I reject the submissions by counsel for ANM to the effect that the areas of uncertainty in Mr Humphreys’ letter were of such significance as to lead to a conclusion that his letter should not be treated as part of the “exchange of letters”.
Auspine had from time to time supplied chip which was not suitable for the Boyer mill. According to the submissions on behalf of ANM those supplies put Auspine in breach of an implied condition that the chip be reasonably fit for the use to which ANM intended it to be put. If ANM had, at the time of the faulty deliveries, refused to trade further with Auspine, it could be that such a submission might have been available to it to ward off an attack by Auspine to the effect that ANM was somehow in breach of its contractual obligations. But that did not happen: instead the parties got back together again and re-activated their trading relationship. I find that from time to time in the period August 1995 to January 1997, the woodchip that Auspine delivered to the Boyer mill was not fit for use in that mill. I find that ANM reacted by sometimes rejecting loads of chip and on other occasions by rescreening the chip. Occasionally it advised Auspine that it would not take further deliveries of chip. But on every occasion, trading between the parties either continued or resumed with further deliveries of woodchip by Auspine to the Boyer mill. The agreement that existed between the parties was never terminated.
ANM contends that it was entitled to terminate and that it did lawfully terminate such agreement as may have subsisted between the parties at the time of the termination. It cites in support of that claim:
· its allegation that all residue chip was sold by Auspine to ANM under the description of chip meeting the Boyer mill specification;
· the failure on the part of Auspine to supply chip to that specification;
· Auspine’s refusal in June 1996 to accept further sawlog from the Star of Peace plantation and its refusal on or about 17 July 1996 to accept any sawlog;
I reject these contentions; I have already stated my reasons for concluding that it was not a term of any agreement that the residue chip was required to achieve the Boyer mill specification; the relevant term was, in my findings, a term that the chip would be based on Auspine’s Export specification and suitable for use in the Boyer mill. I allow for the fact that there were times when the chip supplied might have achieved the Boyer mill specification but that was not because Auspine had contractually committed itself to achieve that specification; it was because Mr Mathys and others at the Scottsdale mill were doing their best to supply chip that would be of a sufficient standard for use at the Boyer mill (even though that standard might not be as good as the Boyer mill specification). As to the sawlog, the short answer is that ANM made a commercial decision to accept Auspine’s conduct on that issue just as Auspine accepted from time to time ANM’s changes to the number of loads that it would accept.
Furthermore, I am satisfied, in respect of the conduct of both parties, that if the changes in the number of loads, or the rejection of some of the loads, or the rejection of any of the sawlog, amounted at the time to a breach of contract, the innocent party has, by its subsequent conduct, waived that breach and cannot now rely on it. Whether the changes or the rejections were introduced unilaterally or by consent, the fact remains that the other party accepted them and continued to trade, thereby affirming (subject to the variations) the continued existence of the contractual arrangement that subsisted between the parties. Based on these findings, it is more appropriate to say, and I so find, that the base agreement between the parties, that is, the 1995 agreement, was varied from time to time rather than finding that there was a series of terminations of existing agreements followed by the establishment of new agreements.
ANM’S CROSS CLAIM
ANM has filed a cross-claim alleging breach of contract by Auspine and seeking damages. It has based its claim first, on Auspine’s alleged wrongful refusal to accept sawlog from the Star of Peace plantation and secondly, because the chip that Auspine supplied to the Boyer mill did not meet the required specification and was not reasonably fit for use in paper manufacture. For the reasons that I have given in my consideration of Auspine’s claim, I do not consider that there is any merit in either of those claims. ANM accepted Auspine’s decision to reject the Star of Peace sawlog; it waived such rights as it may have had. Likewise, ANM mostly accepted the quality of the residue chip that Auspine supplied, rejecting loads from time to time, insisting for a period in having loads rescreened at Auspine’s cost, but, nevertheless continuing to trade with Auspine and continuing to take deliveries of loads of residue chip. It is, in my opinion, quite significant that the letter of termination of 22 January 1997 (Ex A279) made no mention of either of these matters as the cause of termination.
SUMMARY
The findings that I have made favour Auspine. Although I have rejected many of the propositions that were advanced on its behalf, I have nevertheless made findings to the effect that:
· the parties entered into a contract for the supply of woodchip for a period of three years from 1 August 1995;
· the quality of the woodchip was to be such that it would be suitable for use in the Boyer mill;
· although there were occasions when deliveries did not match the required quality, ANM did not assert such rights (if any) as it may have had to terminate the agreement;
· ANM’s notice of intention to “discontinue its purchase from Auspine of sawmill chips” was without justification and its intended conduct in refusing further deliveries after the end of March 1997 would have been an unlawful repudiation of the parties’ agreement.
I will hear the parties further on such consequential findings as should or might be made. For that purpose I grant leave to relist the matter for mention on 14 days notice. On that occasion I will also hear argument on the question of costs.
In the course of these findings it has been necessary for reference to be made to the commercial arrangements that existed from time to time between the parties. It is possible that some of the details of those arrangements may be of a commercially sensitive nature. I am making available to the parties today copies of my findings with the advice that these findings will not be formally published. Liberty is granted to the parties to approach the court to have identified material in the findings withheld from publication upon establishing that such material is commercially sensitive.
Subject thereto, publication of these findings will thereafter be made.
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I certify that this and the preceding (85) eighty five pages are a true copy of the Findings of Fact and Law herein of the Honourable Justice O’Loughlin |
Associate:
Dated:
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Counsel for the Applicant: |
Mr T R Anderson QC and Mr M Selley |
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Solicitor for the Applicant: |
Messrs Piper Alderman |
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Counsel for the Respondent: |
Mr T G R Parker Mr N J Kidd and Mr A Wiseman |
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Solicitor for the Respondent: |
Messrs Allen Allen & Hemsley |
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Date of Hearing: |
30 June, 1-4 July, 11 July, 14-18 July, 1 August, 7 August 1997 |
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Date of publication of findings: |
23 January 1998 |
